AGC Inc. (SHJ.MU) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you very much for joining us today for Q&A session of AGC's Life Science business. I am Tamaki from PR and IR. It is my pleasure to serve you as [ EMC ]. Let me introduce the speaker of the day, our Senior Executive Officer and President of Life Science Company, Tadashi Murano.

This is Murano speaking. Thank you very much for joining us today.

First off, we would like to have Murano-san give you an outline of our Life Science business, followed by questions and answers. The materials to be used have been uploaded through our website. We plan to close the session at around 6:00 today. Thank you very much for your understanding. Murano-san, over to you.

Thank you very much for your time today. Once again, I am Murano, President of Life Science Company. We received several questions from you. And out of that, I'd like to give some accounts on 3 common questions that have been raised by our investors. Some parts will overlap with the QA for our financial calls. I ask you for your understanding. First of all, about our operating profit revision. Back in August, we announced the downward revision of our performance. Life Science businesses include biopharmaceuticals. We have Colorado and Longmont in Colorado in the United States. And we've been talking about the suspension of production in Boulder. And for Longmont, we also suspended our operation previous year. Although we have started a small scale of production because of our customers' conditions, we had to once again suspend the production from Boulder. And there have been some inquiries from other customers. However, it is likely to take time for the market to recover and therefore, will cause further expenses to be incurred. We decided to suspend the operations. We have already done some layoffs of the personnels. And before the end of the year, we would like to transfer the assets to a buyer. Now Life Science have suffered in performance over the past several years. I'd like to describe the background. And as you can see, the Life Science business, about JPY 141 billion in revenue and biopharmaceuticals CDMO accounts for 70%, whereas small molecule pharmaceuticals and agrochemicals CDMO accounts for 30%. Life Science business at AGC began in 2017. As chemicals department, we were handling the business, which had already started back in 2000. And then in 2016 and onward, we expanded our business and the operating profit of JPY 17 billion was once recorded, as you can see, back in 2022. After that, as the line graph indicates, the operating profit began declining and that has continued for the past couple of years. After 2023, we experienced a decline in our business, and that has been explained a number of times during our financial calls. There were many factors behind. Simply put, however, I think we can summarize that into 2. Number one, CDMO demand remains brisk. And as you can see on this slide, in 2018 and 2019 and onwards, biopharmaceuticals and small molecules, pharmaceuticals and agrochemicals, we increased the capacity across the globe. This rapid expansion resulted in the lack of resources on our part, especially in Europe. There were some external factors like Ukraine invaded by Russia, and we also experienced some production problems. We could not really link this brisk demand to our production. AGC is a strength -- has a strength of materials manufacturer and our technological assets could have been used for short-term recoveries. However, after 2020, under COVID, Japanese engineers' technological support had largely been delayed, especially the support for North America was slow. And with regard to demand, specifically for bio business, up to 2023, contract for COVID vaccine had a strong demand based on societal needs. And we've activated more in this part in '23, the demand shrunk quickly. And also around the same time, biotech industry, which is a major customer, faced high interest rate in the United States and experienced low inflow of finance and the demand suffered. Active investment is usually made in CDMO and during the investment phase, the profit is usually negative. From 2016, we had some M&A and we thought it was in line with the demand and we experienced profit from 2022 quite early on. But as you can see from this slide, from 2021, we experienced the second stage of large capacity investment in various regions. And this is expensed in 2023 and beyond in the following years. So the expense was increased and also development business was slow and that led to a huge loss. Especially bio, North America large investment and also new investment -- upfront investment in Japan were the 2 big factors. We have received questions about Life Science business, future outlook. And I would like to explain this as my third point. Bio business accounts for 70% of Life Science. So allow me to explain about that. Bio CDMO business, this is basically focusing on single-use bag or SUB technology for small to middle-sized manufacturing, and we were basically a pioneer in this field, and we were growing our business in this field. So contract in early phase development phase was the mainstay of our business development. When it comes to something like biosimilar, which is a huge contract, large volume, that is not what we're pursuing. We signed a contract with the customer and start manufacturing very quickly and switch them around in 2 to 3 years. So this was the way we were doing business. In bio and CDMO, people often talk about backlog over long-term contract, but that is not our business model. However, as I explained earlier, sudden shrinkage of demand in vaccine and the absence of business taught us that commercialized late phase contract should be increased over the long term into the future. We are trying to do that now. So when we open up new sites this year and next year in Japan, in terms of single-use bag, 5,000 liters, largest level of single-use bag facility will be available. And the Colorado Boulder plant that we will be transferring uses a stainless steel or SUS, not SUB. SUS is a large-sized bioreactor. Our original strength comes from the SUB, single-use bag technology. So our growth will be shifted toward this type of demand. And demand in this particular market is recovering gradually. We have implemented some measures for Colorado -- including Colorado. So from 2022, we want to start turning this profitable and go back to the original trajectory from beyond 2026. We have sufficient capacity. So we have not planned for any additional investments so far, at least for the time being. Operation management, quality management and also technological engineering. These are the expertise that we have. We will concentrate in this business to build trust with our customers and repeatedly receive contracts from our customers. So this is very similar to how we do business in other business segments within AGC, which means that we can leverage our capabilities. For example, the Seattle site in the United States, through support from AGC, was strengthened from 2024 and FDA inspections were done repeatedly, and we were successful. And the plan from 2025 and beyond is also quite solid. So these are some of the questions that we had received in advance. And I just wanted to cover some of the common questions. Now we would like to open the floor for questions.

Murano-san, thank you very much. [Operator Instructions] So let's begin with some questions that we have previously received. Now as you announced your transfer of business in Colorado, what sort of feedbacks have you received from your customers? You have told us that trust is extremely important in the pharmaceutical business. But what is your take on this?

Thank you very much for your question. Now as for this transfer of business from Colorado, especially stainless steel bioreactors business in Colorado, certainly have been studied well for possible impacts. And thus, we made this decision. We received inquiries from other customers. Therefore, we talk with them thoroughly as well before we make this decision. Now from the market, AGC's biopharmaceutical business is regarded as something more fitting to single usage bag type of technology. Therefore, customers do understand the reason why we made this decision and our decision is in line with our customers' expectations. Japan, the U.S. and Europe are the 3 pillars of our business, and we have built a maturity in our business, which will be a great service to our customers who trust us.

Moving on to the next question. By letting all the large-size SUS, would it mean that there will be a negative impact on the single-use-bag business? Maybe you'll get a smaller contract.

Thank you for your question. As far as we can sense, we do not feel any immediate negative impact like the one you have just asked. Single-use bag is our main technology, and we have rich experience in manufacturing and inspection globally. And single -- as far as single-use bag goes, we are second largest in the world. And as we announced before, we will be opening a new site in Yokohama, where we will have the largest size single-use bag 5,000 liters size reactor. We will be able to flexibly respond to a whole variety of needs by our customers once we are ready.

Let us move on to the next question. In your financial statement, Colorado and other bases performances have been disclosed. But it still seems that other than Colorado, you still experienced deficits. What are the factors behind that?

Thank you for your question. Now this is something that we used at our financial call. In the Life Science segment, the biggest deficit was suffered at the Colorado basis in the United States. As for other bases, there are differences. Especially in the biopharmaceutical businesses, we launched some major bases. An example would be Copenhagen as well as Yokohama. I mentioned this as our new manufacturing base. And those are the areas where we made investments before the launch of business. Other than that, other bases are making profit and performance is brisk.

Next question. In Q2 earnings announcement, the performance for Life Science business downgraded. And the biggest factor, I understand, is the transfer of Colorado. But looking at the full year forecast after this downgrade, the net sales level stays flat year-on-year. The market has bottomed out. And Copenhagen new site will be operational, but why is this still flat year-over-year?

Thank you for your question. Net sales is shown as bar graph on this slide. From '24 to '25, the number stays flat. I think that is a question that is being asked. The reason this is flat is in '24, Colorado Boulder commercial production was already online. So this net sales was included in the 2024 numbers. And the COVID-19 contract was finished, and we were experiencing some one-off incomes revenues coming in, in 2024. So excluding all these special factors, the net sales from all the other sites are growing healthily. That is how this can be interpreted. So bio business, Copenhagen new plant, at the end of last year, the operation actually started in this site. And during the second half of '26 or '27, we can expect a big impact coming from this site.

Let's move on to the next question. What is the annual growth rate of your top line? Compared to the market, how should we view your expectation for the top line growth?

Thank you very much for your question. As for the top line growth, as you can see on the pie chart, our Life Science includes 70% of biopharmaceuticals, small molecule and agrochemicals, 30%. Each market has different levels of growth, especially in biopharmaceuticals. This includes many modalities, antigen, mammalian cells, gene and cell therapies which are expected to grow and microbial. So there are different modalities with different rate of growth. So simply put, the market itself is expected to grow about 10% per annum or probably more as the markets expect. In our case, now we have sufficient capacity from 2025 to 2030, CAGR of mid-10% of growth can be expected. So with that kind of outlook, our current investment as well as capacity and construction, we'll be able to cater to achieving that level of growth. And especially recently, when it comes to pharmaceuticals, there are increased uncertainties because of international geopolitical situations. So we will continue to watch how things will unravel and make our decisions flexibly.

Next question. Profit contribution is expected to start in 2027. But out of the net sales assumption in 2027, how much of that is already contracted?

Thank you for the question. As I mentioned in the beginning, bio CDMO and single-molecule pharmaceuticals and biochemicals have different forms of contract. It's very difficult to calculate how much of the contract is already in place, when we think about them in the aggregate according to this business model. So bio CDMO, single bag -- single-use bag business model. And this means that after we get the contract, we need to get another contract 2 to 3 years after that. So it is very difficult to say how much of that is already contracted. But for small-molecule pharmaceutical and agrochemicals, that contract is longer. So it's a little bit more easier for us to calculate. From 2027 and beyond, well, we will see more visibility about what will happen in that time point after we enter FY 2026. What is the demand and also the supply plan? I know that we're receiving many questions about these things. So going forward, we are hoping we can show some indicator to explain this. So once we have that, we will explain.

Earlier, there was a question about the top line growth expectations. On the other hand, from the cost structure perspective, 2026 breakeven probability appears to be high. But how about after 2027, what is your expectation for your profitability growth? Or what is your outlook in your next midterm plan? What is your target in the future of operating profit going forward?

Thank you very much for your question. Well, as we look at the top line, bottom line growth, over the years, actually, the small molecule agrochemical business has been very stable, although the breakdown is not shown here. And we have remained in the block for that. So the challenge remains in the biopharmaceuticals. We continue to receive inquiries and healthy recovery is expected. After 2025, we expect steady growth in this business segment as well. But that does not mean that I'm optimistic. The biggest challenge of our Colorado basis in the United States, we have done structural reform of that operation, but there have been many uncertainties, the factors impacting our business. Therefore, we have to make sure we have a strength to flexibly respond to such factors. Now how about the level of operating profit? For the next midterm plan, we would like to see the 2-digit operating profit margin. So as you look at the pre-investment level, that's the cruising speed type of an operating profit level that we expect. So we plan to come back to that at least 10% or possibly the higher in the 10%.

Next question, Life Science business, ROC 10%. When do you believe that you can achieve this target?

Thank you for the question. ROCE is an index of capital efficiency that we especially focus on internally. ROCE of 10% would be the minimum acceptable level by the capital market as far as we believe. Now when will we achieve ROCE of 10%? I should not sound too optimistic, but after 2028, we believe that we can go back to ROCE of 10%.

The layoff at your Boulder's base has been announced. Other than that, in the overall Life Science sector, do you have a need for additional headcount in any part of your business?

Thank you for your question. Well, the biggest challenge, as I mentioned, has been the biopharmaceutical business, the Colorado base in the United States. And we had to do a major layoff there. But at other bases, reduction in headcount is not necessary, and we do not plan to do so. As we continue to receive more orders, we will be addressing that changes in a flexible manner. So at this point in time, however, we do not have a major plan of either increase or decrease of our workforce. But as I mentioned earlier, we are building a new base in Yokohama in 2026 and to early 2027, we expect to see some businesses to be launched. And this certainly will require headcounts. And that's where we will have to increase our resources. Thank you.

Next question. Can you please talk about the status of inquiries and orders. You have mentioned backlog earlier. Can you please explain the situation, if possible, using some kind of indicator or number for us to have a clear picture. That was the question.

Thank you for the question. We have received similar questions in the past. Is it for the whole life cycle Life Science business or for specific parts of that, we want to think about that differentiation and think about the best way to explain this. For bio CDMO business, as I said before, single-use bag, which is used in early phase and clinical trials, this is about 50% of our business. So once we have the contract, we start production very quickly, and this contract is completed within 2 years or sometimes the contract is extended. But either way, it's pretty cyclic, but this is a typical way a single-use bag business is done. Therefore, basically, we don't see next year's business completely filled because if it's completely filled, then we cannot continue the business. I understand that this business model is difficult to understand. So in order to remove concerns, anxieties, we want to look at something like utilization rate, profitability or order status or outlook. We will look into how we can disclose this information going forward.

But from the geopolitical perspectives and BIOSECURE Act, there is a talk about the potential strengthening of production in the United States. Are you receiving more inquiries in the United States? And how about in Japan and Europe?

Thank you for your question. Well, in terms of our U.S. operations, manufacturing in the United States is something that we have seen even before the current Trump administration. Going forward, depending on what Trump administration chooses to do, there could be multiple possibilities. But in mid- to long term, it is better to supply the U.S. market from the U.S., supply the European market from Europe and supply Japanese market from Japan. So we cannot really be geographically diverse in terms of supply basis. As for inquiries in the United States, number-wise, I think we are seeing some increases. And outside of the United States, our European and Japanese bases certainly do have their own advantages and characteristics. And all of the bases continue to receive very healthy number of inquiries.

Next question, single-use bag. You have -- sorry, WuXi has the #1 capacity in the world. So what is the advantage, strength of AGC over WuXi?

This is the bio CDMO business of Life Science. And WuXi is our competitor from China. And the question is about our strength, competitive advantage. In the bio CDMO business, as you can see on this slide, the status of a single-use bag player is as seen at the bottom left. WuXi is large. And then we can see the global footprint as well as competitiveness as CDMO, which is the history or track record of inspection. We have a global high-quality GMP manufacturing capabilities in U.S., Europe and Japan. We are able to provide high-quality services from any of these regions in the world. And we -- there's a big impact coming from the inspection track record. Based on trust and the track record over many years, we have extensive track record for inspection. This is a huge strength because with the track record, customers feel confident and place more orders with us. It turns into a positive cycle. So there were many inspections done in the past. And gene and cell therapy, commercial track record, we have 10 such inspection records, which is the highest in the world. And ex vivo gene therapy in this segment, in the commercial capacity, we do have a track record that is at the top level of the world. AGC Group is a technology company, which is strong with materials. So by leveraging the strength, we believe that we can gain more trust and also a track record from the customers, and we will be competitive in that aspect.

The CFO talked about Life Science business to be the strategic business going forward continuously. However, the Life Science does not have affinity with AGC's existing expertise, therefore, very difficult to manage. Transfer of the Life Science business as a whole being an option? Why only Colorado basis?

Thank you for your questions. Thank you. That's a very good question. And AGC Group since 1970s, have started studying the possibility of Life Sciences. And then in 2000s, we began expanding the Life Science business. Actually, AGC has more than 100 years of chemistry business. So small molecule business expanded into small molecule agrochemicals and fluorinated intermediates. That's the beginning of our business here as a Life Science, AGC's scientific expertise as well as engineering capabilities have been largely leveraged in Life Science. As you saw in our performance graph from 2016, we started acquisitions to expand our capacities. And therefore, we have garnered a steady top line growth. As for the biopharmaceuticals, which has been the challenge recently, we began this endeavor 40 years ago. In Japan, we are very early in starting this biopharmaceuticals CDMO business at our Chiba base. And as you can see, as the graphic indicates, this business grew quite steadily as well, especially the single-use bag expertise that is our strength is something that we are now focusing on. And other than that, microbials as well as gene therapy, we are now ready to respond to many demands in different modalities. And our track record has been highly appreciated from the market, letting us grow even further into the future. Now when it comes to CDMO business of ours, customer recognition is very important. In 2025, in the pharmaceuticals industry, the global awards, there are many, but we did receive CDMO leadership awards in 4 divisions: AGC Biologics, 3 divisions; AGC Pharma Chemicals, 1 division we have been awarded. So externally, we have been highly appreciated. Other than that, sustainability as well as employee empowerment are the areas that the market regard us very highly. In terms of the affinity with AGC's other capabilities, high-quality management is something that AGC has evolved over the past 100 years, and that's exactly what we do in our Life Science business. I've been in this position for the past 1 year and AGC's capabilities as well as resources can be further harness and leveraged going forward.

Next question is somewhat related about the company's approach against modalities. I understand that the company is not investing into new modalities right now, but are you competitive enough? And what about withdrawing from gene or small molecule modalities, Lonza, Samsung, FUJIFILM, they have different business models from AGC. So maybe AGC should focus on niche market instead. What do you think about this approach?

Thank you for the question. On the slide, you can see the different modalities of the pharmaceutical products from embryonic phase all the way to maturity phase. And the purple and green, these are the areas of modality that we cover. Purple is bio and green is small molecule pharmaceuticals and agrochemicals. As you can see, we are broad, but we are not covering necessarily every modality. We are selective. We're actually selecting modalities where we can leverage our strength. I hope that is clear to you. On the right-hand side, in the maturity phase, we have a protein and also small molecule pharmaceuticals. These are focuses and the performance is strong. Antibody, gene therapy, mRNA will continue to grow. And these are the growing modalities for AGC going forward. So right now, we are not thinking about withdrawing from any of these modalities that we have now. In the introduction phase, we have gene cell therapy and mRNA, and we already have cases where we're actually leading these segments. And we can leverage the technology we have built in the past. So affinity is very high in this segment. With regard to stability of business, antibody and protein are in the growth phase and maturity phase, and single-use bag and quick cycle is the business model that we employ for biopharmaceuticals. But we also want to increase the business in later phase as well. So newly invested Yokohama site will carry 5,000-liter large-sized single-use bag. So we plan to invest into that in Yokohama. More stable, more longer-term contracts ratio should be increased over time, and this is what we're thinking.

Now AGC is changing its business portfolio to respond to the market changes. Now strategic business of Life Sciences, certainly, you're affected by the funds inflow from the bio venture capitalists. In that sense, you're rather vulnerable to the changes in the market. What do you think?

Well, thank you for the question. 30% of Life Science comes from small molecule pharmaceuticals and agrochemicals and single-use bag in biopharmaceutical -- pharmaceutical, by the way, accounts for 70%. And that is where we have lots of biotech customers. AGC customers have a strategic business to be able to respond to changes in the market and Life Science is exactly that and small molecule agrochemical is exactly that. But when it comes to biopharmaceuticals, over the past couple of years, it is true we have been affected by the changes in the market. It's a question of the time line. What sort of horizon you have? The CDMO business in biopharmaceuticals, as we look at the expected growth of the market, we have to have this long-term vision of long-term horizon for our growth trajectory. And small molecule is -- part is unaffected largely by the market changes. So now when it comes to biotechs, especially related to the coronavirus vaccines, new modalities have emerged in developing pharmaceuticals. You're very right. This is an area where very rapid expansion can happen and also the interest rate policies can make a difference in terms of the inflow of funds from the venture capitalists. There may be some postponement of production on the part of our customers. That is very true. Therefore, when it comes to biotech as well as early-stage investment, growth expectation is very high and gene and cell therapy is an area we expect the largest level of growth going forward. Therefore, we have to continue to keep a close watch on what happens in those markets. And also in CDMO business, the late stage contracted manufacturing and development will certainly help us and protect us from the changes in the market going forward as well. Our Yokohama base in Japan will be online very soon. Therefore, the CDMO business in Japan, Europe and the United States will be fully serviced. Therefore, we can leverage the flexibility to be able to absorb any market changes.

Next question. In 2024, you replaced some of the management in order to strengthen the business. What is the impact?

This is about the management within Life Science business. We had investment plan and growth plan, as I showed you earlier, JPY 30 billion turning to JPY 140 billion. And then we will be aiming for JPY 200 billion to JPY 300 billion. So this business has been growing very fast. Growth phase in the past versus growth phase in the future will look different. This is why in 2024, we changed the management. Under the new management, including myself, we will be looking at the challenges for the growth and the size of the business. There may be pain of growth. If we grow too fast, maybe turnover will be high, and we may have challenged hiring, which could lead to productivity not improving. These were some of the challenges that were identified. But by changing the management and implementing measures, we are beginning to see signs of improvement for these issues.

In the future, large-scale SUS may come once again into your focus?

Thank you for the question. Well, once again, this is related to our biopharmaceutical CDMO business. Large SUS, the stainless bioreactors business as well as SUBs, the single-use bag applications that AGC has been very good at. There are 2 separate models. Colorado base has been the base for the SUS, the large-scale reactors. And now the business will be transferred. The question is whether we will once again come back to this application of SUS. Well, the single-use bag has been an area we have been making investment and has been planning growth. Therefore, for the immediate future, we will continue to focus on SUBs to ensure sufficient growth, and we can come back to the growth level that we had previously enjoyed under pharmaceuticals, antibody type of a market that you see. The growth in demand in the yellow -- purple part is the volume zone, the blockbusters largely. And green will be mid- and small-sized pharmaceuticals for orphan drugs, for example. And other than that, we have the clinical trials. The green part is where we expect to see many new technologies to come in, and there will be many small to midsized usages. Therefore, the single-usage bag technology is a perfect fit to this green growth zone. Therefore, for the immediate future, we will capture sufficient growth opportunities. And in 2 years, Yokohama will be ready. It will be the largest 5,000-liter tank for SUB will be operational. Therefore, we will be able to respond to the demand in this area. When it comes to biopharmaceuticals and CDMO, we have to consider mid- to long-term growth of the business. After 2030, we may have to come back and consider the possibility of once again starting SUS. But having said so, single-use package bag technology is an area we expect to continue to grow for the immediate future.

Next question. Capacity utilization remains low. This is what we hear from the IR team. JPY 50 billion is invested into Yokohama to enhance the capacity, why is this? What is the necessity of this investment? And also another related question to this. What is the order outlook for Yokohama?

Thank you for the question. Life Science, biopharmaceuticals, CDMO, I believe this is what the question is about. Life Science business has 10 locations for biopharmaceuticals at different levels of capacity utilizations. We have made investments one by one. For example, for Copenhagen, we built a new plant, which came online at the end of last year. So there are different levels of operations, varying degrees. And capacity utilization for the newer sites will have to be increased because the overall capacity utilization is low. So this is a challenge for biopharmaceuticals and also Life Science as a whole. Why are we investing into Yokohama? Biopharmaceuticals business within Life Science over the next 10 or 20 years, will see solid growth, solid demand. We believe there is sufficient demand over the mid- to long term from our customers. Biopharmaceutical CDMO business, once we decide to build something, it takes 3 years to build. Following that, we need to do GMP manufacturing and inspection as well. So all in all, it takes about 5 years to start the capacity for biopharmaceutical CDMO. Mid- to long-term bio CDMO business globally, looking at what will happen, we have made sufficient investments in Europe. We are transferring Colorado, but in Seattle, we have sufficient capacity for the United States or from the United States. And Japan, well, as a biopharmaceutical CDMO, we were the pioneer with the Chiba plant, but the capacity at Chiba plant is quite small. And also, there was no room for additional investment for Chiba. This is why we decided to invest into Yokohama. Bio CDMO hardly exists in Japan. And there was no supply chain for vaccine in the recent past, and there was a sense of urgency on the side of the government. So this is supposed to be dual use. In the case of situation of emergency, we will be able to manufacture vaccines for Japan as well. This is one of the intentions for this Yokohama site. So when the bio business grows into the future, in Japan, there is basically very small CDMO capacities. We're actually using capacity outside of Japan, like Europe and America in order to accommodate what is needed in Japan. So we want to be able to do this within Japan, and for Japanese pharmaceutical manufacturers, as well. And also, we want to capture the demand for growing Asian market as well over the next 5 to 10 years. Yokohama as a geographical location is very advantageous for us. AGC Group's central research center is located in Yokohama, and this new facility will be built right next to that. So we can collaborate with academia. We can find the global talents and form partnership with various companies or stakeholders. So maybe not immediately, but looking at next 5 to 10 years, we expect Yokohama to be the hub for biopharmaceutical business, and this is why we have decided to invest.

Next question is about small molecule agrochemicals as well as small molecule pharmaceuticals, CDMO. What is the current performance of those businesses as well as your future strategy plus capacity utilization?

Now out of the AGC Life Science business, 30% comes from small molecules pharmaceuticals and agrochemicals. Now this is an area where we can garner long-term purchase contracts, and we are rather immune to market changes. Therefore, the business remains very stable. We are being profitable. Now as for small molecules, we have synthesis, chemical synthesis to work at the CDMO for both agrochemicals and pharmaceuticals. As for the pharmaceuticals, the Japanese bases are fully utilized in terms of their production capacity. The demand is very high. Therefore, we have made an additional investment in our manufacturing base in Spain. Therefore, for small molecule pharmaceuticals because of such additional investment, we expect the more profitability comes in about 2 years. Now when it comes to agrochemicals, this is related to the agricultural market, but the fluctuation is not so great. We are stable in terms of revenues there.

Net sales for agrochemicals is about 15% of Life Science business are here. What about profitability? How does it compare to the pharmaceutical CDMO business?

Thank you for the question. Pharmaceutical CDMO, specifically biopharmaceutical CDMO, actually, this industry grew in the last decade. Average profitability for CDMO is actually difficult to say. So for example, vaccine and biotech fluctuation occurred. But excluding that, CDMO profit is quite stable. And your question is about agrochemicals. Synthetic chemical technology that AGC already had and also stability and quality have been really appreciated. So maybe the relatively slow growth, but high profitability in terms of operating profit, at least double digit.

This is going to be the last question to be entertained. As for the agrochemicals, you have expanded your capacity in Spain, when will it start contributing to your profit?

Thank you for your question. Now as you see on the slide, when it comes to small molecule pharmaceutical CDMO, we have this Spanish base. Actually, the pharmaceuticals company factory has been acquired by us. And in terms of our investment, actually, in the area of pharmaceuticals, we had this chemical synthesis technology, which was a starting point for us. Currently, our factories in Japan are operating at their full capacity. Therefore, we have been shifting the production to Europe. And in Spain, we expect to see more orders coming in. Therefore, we are now building an additional production lines there. Actually, for this new factory, we just opened it this month, but the full operation starts only next year. And after that, we expect to see increased orders coming in. Therefore, the capacity increase in Spain will contribute to our profit after 2027. Thank you for your question.

Now it's time to close the Q&A session. We do apologize that we could not answer all of the questions that we had received but our IR team will respond to those remaining questions after this. Thank you for your understanding. And if you have anything, please let us know by calling 03-3218-5096. The phone number to call if you have any further inquiries is 03-3218-5096. When you close the Zoom screen, the questionnaire will pop up, please help us by filling out the questionnaire so that we can have better IR activities. Thank you very much. That concludes today's briefing. We really appreciate your kind participation. Thank you, and goodbye. [Statements in English on this transcript were spoken by an interpreter present on the live call.]