Ajinomoto Co., Inc. (2802) Earnings Call Transcript & Summary

Good morning, everyone. Despite your busy schedule, thank you for your participation. This is [ Tamura ] from IR Department of Ajinomoto. First, I would like to introduce the speakers from Ajinomoto, Representative Executive Officer, President Fujie.

Hello. This is Fujie. Thank you for participation.

Forge Biologics' Executive General Manager of Biopharma Service Department, Bio & Fine Chemical Division, Otake.

This is Otake. Hello. Nice to have you.

From Forge Biologics, President and Chief Executive Officer, Mr. Maslowski.

Yes. Thank you very much, and good morning.

CTO, Dr. Dismuke.

Hello. Nice to meet you. Thank you.

So those are the 4 gentlemen as a speaker. And other than that, we have participant Mr. Shiragami, Representative and Executive Officer.

Hello. Nice to have you.

And we have Mr. Maeda, Executive Officer, Vice President General Manager of Bio & Fine Chemicals Division, Maeda, Nice to have you.Mizutani, Executive Officer and Vice President, in charge of Finance, Investor Relations.

Mizutani speaking. Hello.

Those are the 3 participants also. And I would like to explain to you the flow of today's schedule first opening remarks by Fujie then from Mr. Otake, Mr. Maslowski and Dr. Dismuke, we will be having explanation on gene therapy manufacturing process of Forge and the video of site tour of Forge. Lastly, but not least the Q&A session. The whole time will be about 1.5 hours. Today's material is loaded on Ajinomoto's IR website. Please refer to them. We would be recording today's contents, including the Q&A session. And later on, they would be uploaded on our IR website. I would like to have your understanding. So without any further ado, we would like to start the meeting. Fujie-san, please.

Ladies and gentlemen, thank you very much for taking time out of your busy schedule to attend our IR event. And this is the messages that I'd like to deliver today. There are 3 main messages. With the mid-term ASV initiative, 2030 road map is underway. And together with Forge, we are working towards achieving ASV indicators, and we are making steady progress. Next, regarding the company, Forge, which is actually already creating business synergy within the Ajinomoto Group, the details will follow in today's presentation. And number three, the management structure itself is evolving and we'd like to further accelerate the pace of corporate value enhancement for the entire Ajinomoto Group. Those are the major topics today. Next, Ajinomoto's purpose. As you can see, is to contribute to the well-being of all human beings and society and planet with to the power of amino science. And with that in mind, Forge is an indispensable part of our business. Next, regarding the business structure, aiming towards 2030 road map. Of the 4 BMX areas, which will be the core businesses, in 2021, Bio & Fine Chemicals was one and food business was one. So 50-50 ratio. That was a breakdown of the profit structure but we are to make solid progress in food business, but other Bio-Pharma business will financially grow so that we can achieve a higher percentage going forward. Next slide describes the ideal state and in -- CDMO business is an important pillar in order to enable the future growth. And we are making speed up and scale up efforts Forge is expected to grow significantly going forward, and it will be a major contributor for the business. Regarding Forge Biologics, it is a relatively young company. It's been only 4 years since inception, and it's rapidly growing. In 2024, the sales topped JPY 10 billion and an operating loss of JPY 7.5 billion is expected. However, during 2025, EBITDA, we are aiming to make a profit in the EBITDA line. And performance-wise, on a monthly basis, some months actually reported some positive figures, which is a good sign. And regarding the Forge top management, at the end of September, according to the CEO succession plan, Forge implemented this new succession plan and appointed a new CEO, President, and John was named as the new CEO. Tim was the former President and as an entrepreneur, he has led the organization quite successfully. But Tim decided to actually pass the baton to someone who has a new perspective because the organization has reached the level of having 350 individuals in the organization. So he made a decision to pass the baton to a new person. And we are very grateful for his contribution in the last 15 years for the [ BMI ] period. And we are expected to dine him together when he comes to Japan. So we truly look forward to develop our personal ties going forward. And whole-heartly support Tim's new endeavors. John, who is taking over has been leading for its business from CCO position. With his long career in the biopharmaceutical industry and management experience at several biopharmaceutical companies, I'm confident that he is the most suitable person to unite and lead Forge going forward as CEO. Also, Mr. Otake, who chairs the Board at Forge and serves as the Head of the Biopharmaceutical Service division, along with CEO, John, continue to be supported by Forge's intangible assets of gene therapy experts who have profound knowledge in the field. So we expect them to drive future growth while furthering collaboration with the Ajinomoto Group. Today, from Forge location in Ohio, we have been honored to have 3 members participating from their location; Mr. Otake, CEO, John; and CTO, David. Taking on the challenge in the field of gene therapy will itself contribute to ASV. Together with Forge, we aim to contribute to patients suffering from rare diseases. So we'd like to further promote ASV under this new collaboration. Gene therapy may still be embryonic but the potential for treating diseases that previously had no effective cure is rapidly growing and significant progress is expected going forward. We believe that gene therapy can save patients' lives and contribute to their healthy living and well-being, and this is going to be an invaluable and significant contribution to those patients. Now let us connect to Forge in Ohio. Hello, President John and everyone else. I'm glad to meet you meet you on this special occasion of Forge's new beginning. Now we'd like to invite John-san to give us a few remarks about your future ambitions. Floor is yours, John.

Thank you very much, Fujie-san, and welcome and greetings to everybody on the call. Thank you for joining here. We're live at Forge Biologics in Columbus, Ohio. And we look forward to giving you background on the gene therapy industry and about Forge's operations and offerings. So I will move and pass along to Otake-san, who will introduce our Gene Therapy section, and then we'll move along with myself and CTO, Dr. David Dismuke, as we share with you the forward vision and business model.

Good morning. This is Otake, Head of the Bio-Pharma Service division. As was reported by Fujie, we are progressing with growth. And Forge, after 4 years establishment, is making JPY 10 billion and over sales with John and Tim and David's under leadership, strong leadership, I think we were being able to make this growth. As was mentioned by Fujie-san earlier, in the Bio-Pharma business, they have been very supportive. We're very grateful bio-pharma service and Tim, we are going to have a consulting agreement and from outside Forge, Tim is going to support the growth of Bio-pharma service division's business. Today, I will show you 1 slide and briefly explain to you about Forge Biologics and from John, we will be hearing more about the gene therapy and from David, we would like to talk about more in detail about it. And after that, I would like to talk about the current business status of Forge as well as [PMI] situation afterwards. So overview of the Forge Biologics already in the gene CDMO industry this company is being focused. We have a manufacturing capacity and manufacturing track record that is notable. And we currently have 20 GMP suites. And in the future, the expansion could be 3x. Another feature here is that as for gene therapy and therapy drugs, we have capacity of 5,000 liters reactors that we own. This is the world's largest manufacturing facility in this kind, and therefore, it enables us to meet the future increases in demand. So with this short period of time since this foundation, we were able to gain 50 and more customers. So without further ado, I'd like to call John to make the explanation, John, please.

Thank you, Otake-san. And before explaining what gene therapy is, let me first explain how the body works. The human body is composed of cells and each have a nucleus, which contains chromosomes, which are clusters of DNA. Genes are located in this DNA, and they are the blueprint for the production of proteins in the cell. The genetic information encoded in the DNA is transcribed into mRNA when needed and the necessary proteins are produced based on the mRNA. The proteins produced are the components of the cells and the enzymes necessary to sustain life. These steps are the basis for maintaining homeostasis in cells. Next slide, please. However, an abnormality in one gene may prevent the production of protein with the required function. In this case, the protein with an adequate function cannot keep the organism functioning properly and may touch off diseases. One method of treating these patients is gene therapy. Gene therapy is a medical technology that treats genetic abnormalities that cause disease by repairing or adding genes to the cells. Next slide, please. Among gene therapies, adeno-associated viral vectors or AAVs are currently the focus of much attention, in gene therapy, a gene for treatment or a target gene, which is designed to manufacture and produce the necessary protein is introduced into targeted cells. In order to efficiently introduce the target gene into target cells, a carrier called a vector is often required. These vectors are often called viral vectors, which are based on viruses that have lost their infectivity and in particular, many of them use AAVs. The introduced therapeutic gene can remain in the cell and produce a persistent functional protein. This allows a long-term therapeutic effect to be achieved with a single treatment. This method does not involve any genetic modification and will be complementary to the required gene. Now that you have an overview of gene therapy, I would like to move on to the next video. And please move to the next slide. [Presentation]

Hello, I'm David Dismuke, I'm the Chief Technical Officer at Forge and before introducing the following the video, let me first explain the AAV manufacturing process. Shown here is a simple summary of the entire process. There are 3 steps in total. The first is to produce plasmas, materials necessary for AAV production. The second is to introduce the plasmas into production cells and culture them to produce AAV. After production, the target AAV is purified from the culture media. The obtain highly purified AAV has been filled and becomes the final product. Next slide, please. Let me explain the plasmid and AAV process in more detail. First, we will discuss the process of producing plasmids needed to create AAV. There are 3 types of plasmids needed in total. The first plasmid of the target genes necessary for treatment. Second is plasmids necessary for making building blocks of the virus and the third are helper plasmids that assist in viral replication and internalization of the target gene. Forge uses helper plasmids developed in-house to support high productivity. Each of these is produced industrially using microorganisms. The plasmid introduced microorganisms are cultured in large scales from which they are extracted and purified to obtain plasmids of required quality and quantity. Next slide, please. Once the plasmid is ready, it is time to start manufacturing the AAV, the production line is HEK293, and human embryonic kidney cell line and often used in the production of biopharmaceuticals. Forge recommends the use of a proprietary strain called ignition cells, which is used by our customers because the strain is highly stable and has a proven track record. First, the strain is cultured step by step to increase the number of cells. Next slide, please. The 3 prepared plasmids are then introduced into these cells. This process is called transfection. By culturing the transfected cells, AAV containing the target gene is produced by the cells. Each cell produces 10,000 to several hundred thousand target particles per cell. Next slide, please. After the culture is completed, the target AAV is separated and purified to obtain the target AAV with high purity. The obtained AAV goes to the filling process and the final AAV is delivered to the patient. Now that you have a general understanding of the production processes, we hope that you will watch the video and learn more about Forge. Next slide, please. [Presentation]

Thank you for viewing this video. From Otake, I would like to talk about the current status, the environment and the progress of PMI and et cetera. This slide shows -- it has been used several times in our IR meetings. This shows the rapid growing gene therapy CDMO market and its possibility. The current market size is worth $7 billion or about JPY 1 trillion. CAGR is 27%. And in 2030, this is going to become $46 billion or approximately JPY 7 trillion market by 2030. In addition, the market for the delivery of genes to target cells for therapy is expected to grow, especially for AAVs, a nonpathogenic and safe method that Forge specializes in. Next, please. This shows Forge Biologics customer acquisition status and sales forecast. Because of the interest rate situation in U.S. fundraising was a difficult situation for the venture capitals and entrepreneurs. But in recent months, the fund raising environment has begun to improve in North America and funds are beginning to circulate to the ventures. And on the left-hand side shows the order received compared to year-on-year, about 2.5x of orders have been received. And for sales on the right-hand side, you can see we are definite to make more than double of the sales after April. Every month, we see growth in our business. And as mentioned by Fujie, for single months, we were making a profit. Next, please. And also, the Ohio region in the United States, where Forge is located like Silicon Valley for semiconductors with high concentration of gene therapy researchers. For this reason, the area is attracting excellent human resources in this field as our source of innovation. And Forge has a lot of experts with more than 50 professor/doctor degree experts. And the employee retention rate is extremely high, meaning that we are able to accumulate know-how in-house in addition to the high level of expertise, and that is the strength of Forge, we believe. Next is the PMI situation, especially how are we creating Ajinomoto Group has a very advanced research and development capabilities. And if we combine this with Forge's manufacturing know-how, we will be able to make more efficient production of AAV, especially Ajinomoto has technological expertise in the development of culture media for biopharmaceuticals and regenerative medicine. And by developing culture media in collaboration with Forge, which will strengthen AAV production, we will be able to develop media that are optimized for Forge's technology, and it will provide greater value to our customers. Ajinomoto's culture media and development team has already begun development and evaluation by Forge's research team is underway. We have, by the way, 3 people coming from Ajinomoto on a business trip. Together with David and with young researchers, they are having communication and try to develop a new segment. And in addition, Ajinomoto has established an R&D team for AAV production. Making full use of its expertise and human resources and Bio & Fine chemicals that was established in April and has already started joint research activities with Forge on various things. We are confident that we can create synergies by combining the expertise of each team. Next, please. In the Bio-Pharma Service business, the supply chain was optimized by integrating overlapping functions. To be more specific, Ajinomoto Althea based in San Diego, the plasma manufacturing function, which was carried out by Althea was transferred and consolidated into Forge. Researchers are doing a very much good communication in between and know-how being transferred from Althea to further strengthen the plasmid manufacturing businesses. Althea is going to focus on their own strength. Next, please. Next is PMI situation that is strengthening our foundation. First, becoming an Ajinomoto group. I think Forge is able to become a member of the Ajinomoto Group and improve reliability by strengthening the management base and introducing various systems, including the governance. Before noon today, by the way, we had visit by the customer. And they said that with the support of Ajinomoto Group, the management is stable. And they said that they were -- that was advantageous for the customers as well. We got this comment. And another advantage is that Ajinomoto's Bio-Pharma Service network spanning from Japan, U.S. and Europe, Forge is able to reach out to a different customer base than before. In reality, the Japanese sales team and Forge's team is visiting Japanese customers and to U.S., a very large customer. OmniChem and Ajinomoto sales customer at this point of time, we are being -- they've been visiting Forge to think and consider about the new area. And next week, by the way, we will be having a global sales conference on Bio-Pharma services. And therefore, the synergy is going to be created and it will accelerate. Furthermore, Ajinomoto's Bio-Pharma service locations, excluding Forge has a rich experience in commercial manufacturing. And this experience and know-how will be shared to Forge, how to cope with the regulation and so forth will also be a help. So that is another creation of synergy in between us. Next, please. This is the health care area. The key to growth is to strategy of anticipating advanced medical modalities, building unique and differentiated technologies through AminoScience and establishing a business foundation. Our health care business, which began as a pharmaceutical use amino acid business has 2 major business streams, CDMO and amino acid-based culture media. In CDMO, we have evolved our business by creating proprietary technologies such as [indiscernible] building a global business foundation through acquisitions such as OmniChem while anticipating advanced medical modalities from small molecule drugs to biopharmaceutical and regenerative medicine. In the Culture Media businesses as well, the company has anticipated new modalities and expanded from serum-free culture media to culture media for biopharmaceuticals and regenerative medicine. In anticipation of the PFO in 2050, the company has set its sights on gene therapy and cell therapy as future growth area where it can anticipate new modalities and differentiate itself through AminoScience. In this context, the acquisition of Forge has provided the company with a business platform for gene therapy CDMO and Forge's unique and differentiated technology. The acquisition of Forge also provides the company with a foothold to expand into the cell therapy field. In the gene and cell therapy field, we believe that the CDMO business and the Culture Media business will be able to expand through greater synergy. So this way, we will be fully utilized the tangible and intangible asset of Ajinomoto, and we will be able to provide more value the company as well as a stakeholder and the society, and we will be able to contribute to the new growth of Ajinomoto. Thank you. That's all from me.

Thank you very much, Otake-san, and those of you attending from Forge. Thank you very much for your presentation. Now we'd like to entertain questions from the audience. [Operator Instructions] Now we'd like to start the Q&A session. Those of you who have questions, please raise your hand or press the raise your hand bottom. First question from Saji-san, Mizuho Securities.

I have 2 questions. First, regarding Fujie-san, this is to Fujie-san. On Slide 6, Page #6. Regarding the sales and profit for this year projection. On a single month, you achieve a certain profit on a single month basis, you mentioned. And why is the performance improving? That is my question. And also regarding goodwill amortization or depreciation -- excuse me, intangible asset amortization amounting to JPY 2 billion. And in order to show a profit, is it including the amortization or not? Is it after depreciation and amortization or not? And versus forecast, is the current performance -- how is your current performance trending versus the forecast? Is it likely to take route, so stably keep generating profits going forward?

Saji-san, thank you very much for the questions. First, Yes, the performance is steadily improving and enhancing. That means that we have a robust progress with the customer negotiations, and we received solid orders from customers. On a single month basis, we received certain amounts of orders and production is stable and the costs are minimized, thanks to the stable incoming orders. And to take your point, on a single month basis, yes, we start to show the profit. However, it is not a full year throughout the year, making profit throughout the year. So that will not be until the year 2025 when EBITDA starts to show a profit. And we believe that it's quite likely that we hit the target. We'd like to further enhance the customer base, increase the number of customers and stabilize production lines. so that we can enhance the business going forward. Thank you very much for the questions.

One more follow-up question. So this is not a seasonal trend. So you are showing profit, and it is likely that it's going to take root throughout the year, the rest of the year. Is that right?

Yes. That is correct. So we'll make sure that we will increase the number of customers going forward.

Number two, second question. In 2030 Forge forecast, $46 billion, that's the size of the market. And last year, it was $34 million, and that it's going to be a 12x increase. So it's going to be $400 million. So I'd like to address this question to Otake-san or John-san. By 2030, forecast gene therapy -- while Forge Biologics, the JPY 46 billion, that's the size of the market. And previously, you mentioned that the metabolic related diseases and central nervous system, NI ophthalmology. Those were the target gene therapy areas, target areas for your gene therapy and those were the sector or segment-wise information you've given before. But at Forge Biologics, what is the therapeutic area-wise characteristics for each AAV? Or when the size reaches JPY 400 million, which area, which segment or which therapeutic area is likely to lead the growth? That is my second question.

This is Otake speaking. I'd like to take that question. Speaking of our AAV market, it's going to increase its size rapidly, significantly going forward. That is our perception. And in reality, consulting with our customers, they expect a huge growth as well. And regarding rare diseases, the rare diseases are the main topic of AAV. However, outside rare diseases, therapeutic areas are our targets of the gene therapy that are on the horizon. On the other hand, Forge's strength, where does it lie? AAV is currently used for 9 particular purposes, AAV1 and 9 and that Forge has the capacity to manufacture all these AAV types, AAV1 and 9. So we are 1 of the 2 global companies who can do this, and that where our strength lies.

So by therapeutic area, can you name a few?

Yes, this is John. I can add on to Otake-san's points. So therapeutic areas actually wouldn't be limited as targets. We can treat all different types of therapeutic areas. I think of particular interest are CNS disorders, muscular disorders that require, obviously, the entire body to be treated and we can produce AAV that treats across all these different types of modalities and really target a large amount of patients who suffer from those diseases. Although that might be some of the lead disorders we would pursue, our clients have also gone into all the other therapeutic areas you previously mentioned, We have looked into eye disorders, hearing disorders, some cancers. So as you can see, even some nonrare disorders, there is a very broad way to treat most of the population through many, many diseases using all these AAV capsid types.

So I have a high expectation of your business.

Next question is Miyazaki-san from Goldman Sachs.

Miyazaki from Goldman Sachs. I have 2 questions. First, Forge Biologics management. Today, we've met CEO and President, and he succeeded this company, and I was explained about this background. Tim-san is away and you're going to do the PMI. So how long did you expect this as Ajinomoto? Ajinomoto, after acquisition, were there any strategic changes, can you talk about this change of succession? That's my first question. And another question is on Page 13 of the materials, you talked about gene therapy and the market and its growth. And in 2023, you have shown us according to the material '23 and '24's progress seems to be is it outperforming the market or in a short period of time? Is it underperforming? Can you talk us about the trend? Is it from the macroeconomic perspective or impact or from the customers' changes and so forth. Can you talk us about this market trend as well?

So Miyazaki-san, thank you very much. The first part I would like to answer from Fujie and the second part will be answered from Otake-san.

For the first part, from the acquisition point, certain period of time. I've -- we've asked Tim to be involved in PMI for a certain period of time and PMI went through smoothly for 1 year. And as I mentioned earlier, the start-up 0 to 1, he's good at it Tim. Current status of this forge company is making 1 to 10 and more. So in that sense, I think the management is very important. So during our discussion with everybody, I think we have asked them to stay for at least 1 year, and that's what we thought. And within that time period, succession was carried out successfully. And Mr. Otake, as mentioned and John and David, they are all with us. Of course, having the aspiration of Tim is with us but as was mentioned by Otake-san, he's going to stay with us as a Bio-Pharma Service adviser. So he is going to support us so that he will support the growth of the Forge as well.

And the second item about the market side, the current growth, is it along with this growth of the market? I would like to comment on that. Naturally, in 2024, the data, we have not updated the latest figures and numbers, but Forge's business is growing. And we have increased number of pipelines as well, at least I think there is not a big change or deviation from this growth of the market.