AGC Inc. (5201) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to AGC Inc. Life Science Business Briefing. Serving as moderator, I am Tamaki from Corporate Communications and Investor Relations. Because of the infection of COVID-19, we are conducting this briefing on an online basis, and we are running the venue with consideration for prevention of infection. And in order to make sure that you can hear well, we are not wearing the masks if we are speaking to you, to the audience. Let me introduce the speaker today, Mr. Noriyuki Komuro, General Manager of Life Science General Division of Chemicals company.

Thank you for the introduction. I am Komuro.

First, Mr. Komuro will make presentation followed by Q&A. And you're scheduled to end this briefing at quarter past 6 Japan time. Now without further ado, over to you, Mr. Komuro.

Thank you very much for joining us despite your busy schedule today for our life science business briefing. Now without further ado, I'd like to discuss our Life Sciences business. So this is the agenda today. There are 4 items to discuss about our business. I'd like to make myself understood as well as possible. First, the positioning of our Life Science business in the company. And this is Chemical segment of our company. You can see the business scale from last fiscal year. On the left top, in the AGC Group, JPY 1.4 trillion plus in sales. And in the blue part, Chemical segment, JPY 450 billion in sales. And of that, Life Science is about JPY 80 billion approximately in revenue. That was the actual result from last year. And as you can see in Life Science, there is small molecule pharmaceuticals and biopharmaceuticals and fine silica. Those are the 3 major businesses that we have in Life Science. Here, you can see the value chain of our chemical products. Over to the left, you see the electrolysis of low salt to have chlorine and caustic soda. And after that, the composition using chlorine, you have chloromethane and fluorinated chemicals. You'll replace chlorine with fluorine to have various culminated resins, as you can see, indicated in green. And then for Chemicals business at the right bottom corner, there is a purple part, which represents life science and small molecule pharmaceuticals and aero chemicals, CDMO, contract development and manufacturing. So in the fluorochemicals businesses, we have originally expanded our business to Life Science. And in the small molecule contract development demonstrating organization, we have also developed our business in biopharmaceuticals and silicon using our expertise in the small molecule business. And this is what I explained earlier, and this shows the history of AGC's Life Science business. I think I've shown this last year. So some of you may remember this, regionally, as you can see, at the top, in 1973, Life Science team was launched. And with regard to commercialization, on the left, you see the small molecule business and on the right, biopharmaceuticals, on the left, the small molecule business. But in 1985, fluorinated intermediate contract manufacturing was started. So the business was started in 1985 for small molecule business or synthetic business. And then Wakasa Fine Chemicals was acquired in 2008. The tafluprost anti-glaucoma drug substance was approved or drug was approved. And we have fixed our focus on the small molecule pharmaceuticals, and this was the trigger. And the big development was made in 2013. We established a new plant, Kaminaka plant in Wakasa to the Valley. And from Boehringer Ingelheim, we have acquired plant in Spain 2019. In the same year, we have increased the production capacity tenfold at Chiba plant. So small molecule business was significantly expanded around these years. And the facility that was acquired in Spain was expanded as well. And just the other last month, we spent JPY 10 billion to expand facilities at Kaminaka plant, and that was just announced to the press. And to the right, you see the biopharmaceuticals business. In 1973, Life Science team was established. And 10 years later, in 1984, bio group was launched. But the business was started in the full scale basis in 2000. And at the moment, the Chiba factory is doing this business in Japan. And biopharmaceutical facility was established in 2008. And in 2016, Biomeva was acquired. It was a German company. And since then, almost every year, we did major acquisitions or production capacity expansions. And so quite rapidly, we are expanding this business. And likewise, in summer this year, July or August, we made this press release from Novartis, the factory that was engaged in the gene therapy or AV in Longmont was acquired. So we have been also focusing on gene therapy as well. Now looking at the industry or market overall. Just briefly, as you can see in this chart, you can see the pharmaceutical, the global market chronological changes, and the green portion is small molecular pharmaceuticals at the bottom. And the purple one in the middle is the microbial and mammalian-derived biopharmaceuticals or conventional biopharmaceuticals, as we call it. And the orange portion is gene and cell therapies, which is at the forefront in this therapeutic area, [indiscernible] which is well known. It costs you JPY 30 million, JPY 40 million per administration. That was well reported in the media. So that is one of those therapies. And at the right most hand, you see the CAGR between 2020 and '26. What we have been working on are those 3 areas, small molecule, 6%; and conventional biopharmaceuticals, 8%; gene and therapy, 56%. Those are the growth rate. So all 3 are growing steadily. Especially gene therapy is quite promising. And a similar chart is here as well. We're just looking at CDMO market alone. And as you can see at the right, you see a CAGR between 2020 and 2026, and small molecules, 7%; the biopharmaceuticals, 11%; and gene and cell therapies, 30%. Those are the growth rates. And every year, steady high growth is expected going forward for all 3 areas, so high growth rate is expected. So investments have been also proactively made by various companies in this space. Next, let me explain about our strengths. There are 3 major strengths. As you can see here, the first one is the production that we're catering to customer needs. So we have 3 regions in Japan, U.S. and Europe, and we have high-level cGMP production offering a wide range of services. So basically, the CDMO business is especially advanced in U.S. and Europe. Especially for biopharmaceuticals, U.S. and Europe are taking a large share in the market. So there are very few players in Japan doing this business. So this is the biggest differentiating point for us because we have businesses in all 3 regions: Japan, U.S. and Europe. And second one is the track record in commercial phase manufacturing. In pharmaceutical manufacturing, clinical trials will need to be done. You develop drugs and you have to test the drugs. And during this testing phase, the quality requirement for manufacturing of those that are tested. And also, those drugs are approved and produce for the benefit of patients. And if you are producing these for patients in the clinical setting, the quality level required is 1 level or 2 levels higher. And if you have actual track record in commercial phase manufacturing, there is a big difference between those that have the record and that do not. And third is technological competence. You have cutting-edge technology to follow manufacturing development challenges. As I will explain later, we have single-use pack. We were one of the first that has adopted this in the CDMO globally. And in terms of single-use pack, we have the largest share in the world. This is what I was talking about when I said we do business in all 3 regions: Japan, U.S. and Europe. Starting from the biopharmaceuticals, the blue dots represents biopharmaceutical manufacturing locations. On the left, you see the Americas. And Seattle is the leftmost one. The Microbial and Microbial business is done here. And then in the middle, there 2 plants in Colorado. The left is in the border. The mammalian cells, 20,000-liter capacity cells is U.S. bioreactors. There are 2 bioreactors in this plant as I explain more later. And the other one in Colorado is in Longmont. And this is the gene therapy and cell therapy viral vector production facility that we announced about the other day. And then in Europe, Copenhagen, Microbial and Mammalian. And in the middle, Heidelberg microbial business. And the other day, we made press release plasmid DNA and the messenger RNA, which is quite well known because of COVID-19 vaccine. The plasmid DNA is the raw material for messenger RNA. So CDMO for this is what we also do. And then the bottom, the Milan business. Last year, we acquired gene therapy and serotherapy business here. And then on the left, the red one is Malgrat, 1-hour drive from Barcelona. There is a synthetic pharmaceuticals business plant. But in 2019, we acquired this plant. Then over to the right is Japan. Basically, Chiba plant represented in green deals with microbial, mammalian and small molecule pharmaceutical and agrochemicals, so all these are done and Fukui, the synthetic pharmaceuticals and agrochemicals. And as I explained, in Yokohama, there's development work being done in production. Next is a production network catering to customer needs. So as I explained earlier, a lot of manufacturing locations around the world. And also another strength of ours is that as agency biologics at all production locations, the same level cGMP service is being offered. Especially when you look at foreign competitors, even if they buy other companies, they leave the company name as they are. And independently, those businesses are still run even after acquisition. But in our case, for example, MolMed was acquired in last year. But the company name is immediately changed to AGC Biologics and its management was also integrated into AGC Group. So in any locations, you can enjoy the same level of service at the same price services being offered. So by depending on the customers, when they would like to get their services, sometimes they are not able to access those services, but we can use the global site, so that we are able to meet the customers -- meet the customers' needs using different site, which locate globally from different regions. Next slide please. This talks about the Boulder site having a 20,000 liter. So this explains that. We have single-use pack that is SUB, which is in the purple. This is a single-use pack. So this is the single use. So the pack is discarded after the single use. Normally, if the package is SUS tank, after SUS has been used, it is cleaned, then disinfected, then at the time it is being used again. So once the manufacturing is done, after the next manufacturing is going to be done, before that is done, there's a downtime. However, because this is SUB, we can just discard and we can have a small lot, multiple variable products manufacturing can be done because of less downtime between each productions. On the right-hand side, there is a SUB, that is we do have a 2,000-liter or 3,000-liter pack. But we do have 20,000-liter pack. Compared to 2,000, it's 20,000. Of course, that is tenfold. So this is suited for the large-scale projects. So if the project becomes major, the SUS 20,000-liter tank is used. And at the same time, if the project side is not so large, then we have a 6-pack configuration. That means we connect 6 2,000-liter pack, and that comes up to 12,000-liter altogether. If the volume is a little bit in short for SUS, then we can connect the single-use pack, then we can meet the customers' news for that scale. So basically, we have 2,000 liters. A single-use pack is the core of the business. However, we can support, of course, 20,000-liter pack. We purchased it last year and that is in full operation from this year. So therefore, we will be able to provide these services for our large-scale projects from now on. This talks about our commercial phase manufacturing track record. Before the commercial manufacturing started, of course, there's FDA or EMA and PMDA approval. This inspection is done. That is the premium inspection by each agent. And Kobayashi Kako had a problem in the -- has become a recent news. This inspection is very, very stringent. But we received the inspection from these 3, the FDA, EMA, PMDA and passed the inspection. So now I'd like to talk about track record in commercial sales manufacturing. From year 2019 results to 2021 forecast and the right-hand side is the next year's forecast. So commercial manufacturing is increasing. Particularly when it comes to 2022 forecast, actual commercial and late-stage development altogether will become 90% of our sales. So the development stage project, it's very low the success probability when it comes to pharmaceutical products. But it is commercial, the commercial sales will be very stable because it's already approved and we're able to provide the commercial product to the patients who meet this product every year. So in the future, if we have a commercial sales ratio increases, that means that our business will be more and more stable. So not late-stage development also is important. I'd like to add to that, early-stage development is, in terms of CDMOs, the approval level, the -- of course, that we have to be complying with GMP. But a small- to medium-sized CDMO can support early-stage development. However, when it comes to late-stage development, particularly for Phase 3, the late-stage development data is going to be submitted as a dossier for the MDA. So therefore, the late-stage development means that once that a drug is being approved, then we will get the commercial order. Have more late-stage development, meaning we have the future business. Phase 3 success ratio is about 60% or 70%, I think. So late-stage, 70% or 60% -- 60% to 70% of late-stage development will become commercial project in the future. I'm talking of the biopharmaceutical. The commercial sales ratio is going to increase in the future to give us more stable business. Now I'd like to talk about our technological competence. We have acquired more technologies. However, having said that, in this biopharmaceutical world, technology is evolving day by day. So therefore, we have to always try to get new technologies always. Single-use technology, as a CDMO, we are the first one to use that in the world, much earlier than other competitors. And as a plasmid DNA, that is the technology that we started to use compared to other competitors. I can talk about this later. There's Pfizer -- actually BioNtech. Pfizer-BioNtech is our customer to manufacture plasmid DNA for vaccine. We expect us to launch new technologies earlier than competitors in the future. And there's our Seattle microbial mammalian R&D center on the left-hand side. And in middle center, there's Milan R&D center for gene therapy. So technology is going to be transferred to Colorado Longmont, from Milan to Longmont. And also in japan, we are thinking of the developing Japan side also for businesses. In Yokohama, but there are new technologies, applications such as RPA, IPA cells. This is the technology that we are thinking of using or developing in Yokohama. This chart talks about COVID-19-related projects. This is the ones that we are allowed to disclose to the public using the newspapers. So there are other projects which we're not able to talk about. So there's 7 COVID-19-related projects, which we contracted. BioNTech sometimes called Beyontec or BioNTech, which is on the bottom hand of this slide. And also Novavax, which is the second from the bottom, this is a targeted pharmaceutical. They signed the contract with Japan government -- Japanese government for the 150 million times of the injection. And this is the adjuvant for Novovax. So I'd like to talk about the current situation and also on the future situation. This slide talks about the -- what I have talked about using animation. As I said earlier, in Japan, pharmaceuticals and the and the -- and also microbial CDMO was our original business. And Biomeva, we acquired in 2016. So we entered the microbial business. So Biomeva's messenger -- plasmid DNA was already our business at that time. In year 2017, we acquired CMC to acquire the mammalian cell technology. And we acquired 2 sites, Seattle and Copenhagen. And after that, in year 2019, a synthetic pharmaceutical, the plant in Spain was acquired, so that we entered European market. Then after that, using CMC technology from last year, in Chiba plant of Japan, we started providing services of mammalian cell in Japan. MolMed was acquired last year. The virus vector for gene and solid therapy is -- has become our new area last year. And after that, we acquired AstraZeneca U.S. plant, 20,000-liter standard tank was acquired after that. And also the Spain for synthetic pharmaceutical was expanded. And also on the right-hand side, MolMed acquisition was done. And after that, we expanded the facility. And summer of this year, we acquired a Colorado plant from Novartis. So we were able to do our businesses in the U.S. That is already decided. And also messenger RNA will be entered, and business entry is going to be done in Heidelberg in 2023. So messenger RNA, gene and cell therapy are going to be used. And we're thinking of using this technology to do some businesses in Japan. So this is the initiatives. We already talked about the Milan, Italy, currently gene and cell therapy. There is a very limited number of commercial projects, about 3 of them. The track record of this company, which we acquired, and we're trying to transform that businesses -- we are trying to do that business in U.S. also. Particularly for gene and cell therapy, plasmid DNA is used, so there's a hydrochloric plant, manufacturing plasmid DNA, and that will be assigned to Milan, Italy or sent to Longmont, U.S. And in the future, we'd like to receive that in Japan, so that we can have the end-to-end manufacturing from a plasmid DNA to virus. It is plasmid DNA, as I said earlier, is on messenger RNA's raw material, which is on the bottom of the left-hand side. So not only plasmid DNA, but we would like to expand our services to cover messenger RNA in the future. Also the slide talks about these MolMed pharmaceuticals and agrochemical area, which is synthetic pharmaceuticals. I'm repeating myself. Left-hand side is our Chiba plant. We expanded the capacity by tenfold. And also the Spanish, the capacity will be 1.3x more. And in 2024, the Wasaka plant expansion is going to be done, which is 1.5x more than current capacity. Demand is growing 6% to 7% year-on-year. So the demand growth is steady. And we would like to catch up with that demand by expanding our businesses. And here, you can see the cumulative investment amount and sales changes. On the left, you see the Life Science investment in cumulative amount from 2016 to this year. A total of JPY 200 billion was spent. And from next year through 2025, another JPY 20 billion -- JPY 200 billion or more will be invested to expand the business. And then result or the basis of that is that in 2025, we're looking at JPY 200 billion in sales. But if we can expand in the pace that we are growing now, it could be moved up by 1 year so that we can reach JPY 200 billion in 2024. And in 2016, Life Science business division was established, and JPY 100 billion in 2025 in sales was the original target back then. But since then, compared to where we were, the assumption or plan that we recently had was -- has been outpaced in our business expansion. And of course, we are spending more rapidly, and sales have been increasing much more rapidly in accordance with that. Here, you can see what I have already explained in 1 chart. First of all, the small molecule and biopharmaceuticals, top and bottom JPY 110 billion for this year's forecast, that has been announced. The JPY 110 billion can be covered by the investment that we have already made in 2020. And going forward, in 2023, as we already released, all the things that I have explained have been already press released after the company's decision was made to make investments. And in 2024, 2025, we can reach JPY 200 billion sales with all the investments that we have already announced externally. That's enough to cover that. And then JPY 200 billion is just an interim point. And we are looking at further growth beyond that. So obviously, small molecule pharmaceuticals and microbial mammalian cells conventional business and also M&As at the bottom, what will come after gene and serotherapy, be it IPS cell therapy or whatever, what we don't have right now is something that we also starting to include in order to make further growth. And this is my last slide. This is future technological development modalities. What's written in bold, block letters, [indiscernible] letters are the ones that we have already working -- worked on. And of this existing portion, the production -- productivity improvement, the [indiscernible] development is now being done. For example, synthetic biology, and AI and DX, all these technologies are also introduced in biopharmaceuticals as well. And so that productivity improvement can be achieved. So various technologies are there to capture. And then on the right bottom side, taking advantage of these technologies, there are diseases that can be cured that used to be impossible to be cured. And then the right top corner, you see the IPS cells and new modalities, for sure. In the previous chart, we were just showing years up until 2025. So by 2025, we will need to have come up with something new as new businesses. So by 2025, we will probably go through other new M&As to enter into new business areas. That is all for me. Thank you very much for your attention.

Thank you, Mr. Komuro, for your presentation. [Operator Instructions] We do have the questions that we already received, And also we'd like to answer your questions which you are currently entering using chat technology. So first question, the byproduct, actually, bimodality, maybe that is more a better word. Could you describe your company's position in the overall CDMO market and your competitors in each key area by product? And also, could you tell us about your current production capacity and outlook for the production capacity in the midterm plan in light of your company's position in industry?

Would you please take a look at the Page 9 of the presentation. This is something that I briefly touched upon. What we are doing at our businesses, our business scope is this 3 area, particularly product producing, what we call drug substances or API. So filling or fill finish is not something that we do. So these 3 areas are our business areas. So I just want to talk about this. This is by category. So small molecule pharmaceuticals, which is in the bottom, globally speaking our share is very small, right? Probably, it's just 1%. It's not like we have a mega CDMO. Lonza is a large company, but still their share is maybe only 5%. So we have the large number of CDMOs. And we are really having a big position in the small molecule pharmaceuticals. The Chemicals, #5, page #5. In terms of business side, actually, we are not trying to be bigger for our size, we'd like to use our chlorine technology to give us a competitive edge. So China or India CDMOs, they have a very large tanks, but they are not our competitors. We would like to provide high value-added products to niche market. And in terms of bioparaceuticals, speaking Lonza is a very famous company for gene and cell and Boehringer Ingelheim. Historically, these 2 companies are very strong as a pharmaceutical CDMO. They're leaders. And we -- Fujifilm and I -- we are trying to catch up to them. And Samsung in South Korea, and Wuxi in China also the ones trying to catch up. We are ahead of them though. Talking on venture are other competitors, again there are so many CDMOs in this market. Did I answer your question? I hope so.

Next question is about current production capacity, single pack -- single-use pack and stainless steel The current production capacity and production capacity forecast in the medium-term management account. And in light of the positioning of AGC in the industry, if you can share that information with us would be appreciated. That was the question.

Well, please turn to Page 14. As explained, in the case of biopharmaceuticals, as I said, the stainless steel 20,000 liter, if you have that, a single-use bag is 2,000 liters. So there's tenfold increasing capacity. So in biopharmaceutical CDMO major players, if you have many stainless steel 20,000-liter bioreactors, then you are called major players. Lonza, Boehringer Ingelheim that I mentioned, have a capacity of 30,000 -- 300,000 or 400,000 liters. And Samsung, more than 400,000 liters. So we have 20,000 times 2, meaning 40,000 liters. So one order of magnitude smaller for us. And in Fujifilm, 20,000 liter times 6, meaning 120,000, and they are planning to increase that by 6 as they announced. And fortunately, for us, from this year, we have started the operation for these facilities, and there are more orders that we received than we had expected. So we are hoping to increase the production capacity for this part as well. And as for single-use packs, there are so many small ones -- small players. So honestly speaking, we have not been able to keep track of the capacity that each one has. But as I said, things are not clear in China. But in Japan, U.S. and Europe, amongst the major CDMO players, we are the largest in terms of capacity. But last year, we had shared with you the capacity chart, but we have excluded that this year. So I don't remember the exact number of the [indiscernible]. That's as far as I can say.

Well, single-use pack and stainless steel tank, which one are you going to focus on in terms of production capacity increase? That was the question as well.

Well, the answer is both, I will say. Because in both businesses, there's demand and we have to respond to that. And we are going to increase the production capacity in response to the demand increase. Especially for single-use business, we have capacity in Japan, U.S. and Europe. So in each of the regions, in accordance with the demand increase in each region, we are going to respond. In the case of SUS, there's only one location that we have, and that's in Colorado. And capacity-wise, we have to use -- depend on Colorado to respond to the whole demand in the world.

So the production capacity increase ahead of the orders of the customers. Are you going to make investments or decide to make investments? Or is it the case that you are not going to make decision until you have the commitment from the customers?

Well, in terms of the answer, I think the latter is more or less our approach. I think that will be the right answer. In the case of contract manufacturing, especially for bio, could be financial crisis, great financial crisis like Lehman Brothers downfall, the fund flowing into biotechnology could become limited and development could be reduced and our business became challenging. And those who are in the biopharmaceutical business for a long time, I think there are several times that they have experienced that. So you have to make sure that you have a steady commitment from the customers for the demand, then we can consider increasing the capacity. Maybe the person who asked this question had Samsung, Fuji and Fujifilm in mind were ahead of the curve in terms of increasing the capacity. But in our case, rather than increasing the existing production capacity, we are hoping to spend the same amount of money, if we are to spend the money, in capturing new modalities.

Next question is about your strengths as you see. Would you please talk about the competitive situation on CDMO market? You explained that there are many, many companies. So would you please explain how your company competes with our competitors in areas where you are strong? I would like to understand your strategy for that.

Thank you very much for your question. In that sense, would you please take a look at Page 13 of my presentation. Compared to competitors when we try to receive orders from certain pharmaceuticals, what we need to do or what competitors need to do need to provide some level of services. But still, we need to differentiate ourselves. How do we do that? Because this is a pharmaceutical product, quality has to be assured. There are very stringent limitations. And the rules as very, very concrete, and there are a lot of bureaucracies. So sometimes, the customer's request is going to be very difficult to be met. However, still, what we'd like to achieve and what our sales points are customer-centric culture of a company. We have a technology and also the technology important -- it's going to be more and more important to meet the customer requirement. And we needed to also assure the quality of the product. We have to be in compliant with GMP and then meet the customers' request and sometimes we need to be flexible. And we can do that. That is our strength, I think. And of course, there are new technologies that we have, as I explained. However, if the technology is too advanced to you, then that probably doesn't suit to the pharmaceutical industry because pharmaceutical industry is very conservative. If the 2 new technology is going to be adopted, sometimes the -- that doesn't really help us. So rather, we -- our strategy is having a very steady and very robust relationship with our customers.

The next question is about '24 and 2025. After you achieve the sales target of JPY 200 billion, what do you envision your position or your company would be? Would you please tell us about your vision up until maybe 2030?

Well, I'd like to talk about biopharmaceutical to answer your question. Currently, the pharmaceutical industry as a whole, the pharmaceuticals companies don't manufacture themselves and just use CDMO. I think there is a big trend in the industry. However, for the biopharmaceutical, I think it's only 15% usage of CDMO. So the CDMO ratio for the biopharmaceutical is very low. I think when it comes to synthetic pharmaceuticals, 70% to 80% is the ratio. And for the fill and finish, maybe close to 100%. So CDMO usage for biopharmceutical, which is too low, that means that we have a huge room for the growth for the biopharmaceutical area. And after 2025, up until 2030, even beyond that, biopharmaceutical CDMO growth can continue. What we think in Samsung, the Fujifilm, already made a major investment. That is because I believe they have a quite high conviction to expect the biopharmaceutical growth. Right now, the pharmaceutical company is producing -- maturing biopharmaceutic provider themselves because CDMO do not enough capacity. So if CDMO have plenty capacity, the demand will follow. Going to 2013, that was the time that CDMO had a difficult time. Lonza -- even Lonza was having a difficulty making money. But right now, of course, after COVID-19, from our industry, that is a tailwind. Samsung was making investment without having any business commitment is growing their business because of the current situation. And AGC thinks that sometimes this fortunate things happen in terms of the industry. But we don't want to depend on the luck. We would like to use the new modality. So having said that, of course, the new modality is important. But mammalian's investment is something that we would like to utilize. JPY 200 billion is just the transition point. We would like to -- if we keep up this pace, we can have bigger the sales growth, such as JPY 250 billion or even more structure. If the financial crisis doesn't happen, then pharmaceutical company will start -- will continually using CDMO, looking biosynthetic pharmaceutical and also fill and finish, the growth will continue until it becomes 60%, 70%. And after that, the market will saturate. So therefore, the biopharmaceutical growth will continue.

The sales for this year JPY 110 billion in forecast. In 2024, 2025, when you reach JPY 200 billion, what will be the sales mix by modality or AGC business? How do you see that change, the current status, the sales mix at the time of 2024 or '25 when you reach JPY 200 billion? Those are the 2 questions.

Well, last year, in this briefing, I said 40%, 60%. Small molecule, 40% and bio, 60%. But this year, 30% to 70%. And then when we reach JPY 200 billion, from the 20% to 80%. So biopharmaceutical will have a greater growth. Of course, we are growing the small molecule as well, but biopharmaceutical is expected to grow more.

Then when you reach JPY 200 billion in sales, what do you see the operating margin that you can achieve?

Currently, about 20% for this year, probably, that's what we've learned. And the economy of scale is what we can enjoy in this industry as well. So as the sales grow, the operating profitability will also increase. So in that sense, we are achieving probably JPY 100 billion. And once we reach JPY 200 billion, what would be the operating margin? Well, if you look at the peer, of course, you are all analysts, and you must be looking at the industry peer. But the biopharmaceutical operating margin is quite unclear. Samsung and Wuxi are the only ones probably were dedicated to biopharmaceutical CDMO, and they are disclosing the operating margin. But Fujifilm and others like Lonza are combining various businesses. So we can't compare ourselves to others. So the things are not that clear, but our -- according to our assumption, operating profitability is going to be improved by 10 percentage points.

Next question is about the COVID-19-related business sales. Would you please tell us the -- maybe the scale of the COVID-19-related business sale?

Well, I am not able to give you a specific or accurate number. But it's not really small. It's not negligible. The COVID-19-related business sales is quite impactful, to some extent. I'm sorry that is kind of ambiguous. That means that we are not able to give any specific numbers.

Right. So in relation to COVID-19, if the FDA approval is delayed or not able to be obtained for the business for COVID-19-related businesses, how your business is going to be impacted if that happens?

Okay. Let me take a look at the -- if there's any slide to explain. Page 18, please. In that sense, the third one, Takara Bio, we received this business. However, the clinical trial is not really going well I heard, but right now, the sales forecast is included -- it's not including all of the projects. We expect that everything will go well. I think there's another question. So we received the order, and the numbers reflect the customers' commitment. So the conviction is high, then we reflect that your forecast. If the conviction is not really the high, then that is not really reflected to our business forecast.

Next question, the gene therapy development seems to be a bit stalled. So is there any impact on AGC gene therapy business, CDMO business?

Well, that perception is not something that I can relate to. But more recently, the messenger RNA therapy is now attracting attention and being highlighted. So just recently, using viral vector and gene therapy being pursued. From that sort of approach to messenger RNA use in therapy, that transition is now being witnessed. But in terms of pipeline, it doesn't mean that gene therapy items have been reduced by that much. Much more to come. So in terms of exposure in the mass media, the gene therapy may not have been highlighted that much or as much as they used to. But at least, if you look at the number of clinical trials that are underway in the world and the rate of growth, I'm not seeing any rapid or sudden drop in the number of clinical trials that are underway.

Thank you. Now next question is around the technical. From Novartis, you acquired the gene therapy. Does that support all AGC phenotype? And do you think that [indiscernible] can be manufactured there?

Thank you very much your question. Basically, I don't know if it is reported on a newspaper. Novartis was manufacturing one direct vector product. Therefore, there's only one virus vector which can be produced -- which was produced. And in terms of facility, even if we produce other virus vector, we don't need new facility. So we can transfer technology from Milan to be able to produce new different types of AAV in the future.

Next question is just about strength of MolMed. Can you explain once again what's the strength of MolMed? Behind this question is that CAR-T production is possible. That's what I understand. But MolMed company has been around for some time. So I'm not sure whether they are technologically capable enough. That's the concern. So I'd like to know what the strengths that this company has once again, please.

MolMed company in terms of strengths, the clinical trials and commercial phase manufacturing, we -- I said that there are track records in both. And MolMed, more than 20 years ago, then cutting-edge technologies, like CAR-T technology were used to drug discovery. That's how this company was started originally. So from the early days of gene and cell therapy, they have been fostering and developing their own technologies rather than adopting somebody else's technologies. So from the very beginning of gene and cell therapies, they establish their technologies. And one of them was approved and was lived up to the commercial phase manufacturing. And before the acquisition, I went to Milan actually. And the strength that I felt about MolMed was that to various technological challenges, they were trying to solve all these problems on there. So in case of mammalian cells, if technological change a challenge, then they tend to consult with equipment manufacturers or culture media manufacturers. But this company has established a track record as a pioneer in gene serotherapy. So because they were at the forefront and they are most advanced, so they cannot seek any better expertise or insights from others. So they were trying to come up with their own answers. And they have the capabilities to do that. So that has been appreciated by the customer and the business is expanding continues expanding.

And there is a question about the investment. So to have the customer to have the capacity, do you think that the joint CapEx with your customer? Is this possible that joint customer and AGC CapEx been made?

So that -- yes, there are projects like that. As I explained earlier, gene and cell therapy area. Each company actually have the contract for the specific area. For example, so if analogous is the hotel, we have a 1-year contract for one specific hotel room. That's possible. And depending on the customer's project, we have a specific dedicated equipment for that particular customer where we have a dedicated room to have a continuous manufacturing for that particular customer. You're not asking about the joint venture, right?

No, I don't think the question is about the joint venture. Actually, do you have any possibility of having a joint venture with your customer to establish a new production site?

No, that is not something that we really expect.

Next question is modality. Is there any difference in profitability or the margin in gene therapy store compared to small molecule and mammalian cells? Do you think it will be possible to increase that profitability to a level of small cell and mammalian cells? So the difference in profitability is something that is being asked about.

Well, as I said, if you look at the industry as a whole, how does it look? Well, dedicated CDMO players, if they are specialized in small cell, a small molecule or mammalian gene therapy, then you can compare. But generally speaking, the profitability, the technological level, if it is more than the profitability and if the growth rate on established technologies that are growing less has lower profitability, and those are newly established that are growing more as higher profitability, generally speaking, so in that sense, as I said, we are trying to capture and invest in new technologies as much as possible because the profitability in new areas are higher and also higher in growth as well. But actually, the price that you have to pay to acquire is also high or becoming higher recently. So I have to also consider that. So we would like to make sure we can buy something that is worthwhile.

Next question is, so you are entering global market, the investment or M&A for about new technology that you acquired. Is that Japan science business unit make a very important business decision? Or do you make a decision using the knowledge and insight of these 3 different sites, Japan, U.S. and Europe?

In principle, we have a collective knowledge and insight of Japan, U.S. and Europe. That is the answer. But to be more specific, or the increased capacity when utilization rate is increasing, then we can expect when will be ensured in terms of capacity. So in terms of decision-making, that is simple. However, when it comes to new modality, there is a certain risk. And also, you have to have a technology evaluation. And of course, that you have a valuation with the company. Of course, we're not able to make a decision only by Japan side. So Seattle is a headquarter for the biopharmaceutical. But there are a lot of consultants that we have a contract or we have industry experts that we listen to. So we have a regular contact, a meeting about new technology and also what we should do. We have regular discussions with them to decide the future direction in terms of technology. When it becomes more specific in terms of the possible candidate for the acquisition, then Japan site and Seattle site have a well thorough discussion how to go forward.

Last question to Mr. Komuro, to you, within AGC company, the resource allocation to license business is enough or with more fund to be invested with upfront investments in order to accurate growth? Would that be something that you prefer or necessary? Which one is true?

Well, if I can share my personal view because that was the question that was asked, I guess, so as I said, Samsung and Fujifilm are the ones that are investing JPY 100 billion, hundreds of billions of yen to have capacity in advance. That may be one approach. But 20,000 liter is in a sense an old technology. It is old technology. So if you are spending the same JPY 200 billion or JPY 300 billion, then it will be much more exciting to invest that money in something new. And in Seattle, in CDMO, we were the first to adopt single-use pack. And also, we were the first in adopting the new things. And we -- everyone team is more interested in capturing new technologies rather than keep going with something that is existing. And that is my personal preference as well. And those who are in the bio business is also aligned in that sense.

Thank you very much. Well, thank you for asking so many questions. With that, Time is up, we'd like to conclude Q&A session. And thank you once again for attending this briefing despite your busy schedule. We'd like to conclude Life Science Business Briefing of AGC. If you close the Zoom session, then you will be transferred to feedback sheet site. So please help us with your input to improve future briefings. And if you have further questions, please contact the IR department. Thank you very much for your attendance once again. [Statements in English on this transcript were spoken by an interpreter present on the live call.]