Olympus Corporation (7733) Earnings Call Transcript & Summary

Good evening, everyone. Welcome to the conference. My name is Naoko Saito, coming from Japan, medtech analyst in JPMorgan. It's been a great pleasure to introduce Mr. Yasuo Takeuchi, the President and CEO of Olympus. With that, I will pass on to Mr. Takeuchi. Mr. Takeuchi, please go ahead.

Thank you, Naoko-san. Good evening to the audience in the United States. My name is Yasuo Takeuchi, the CEO of Olympus. Thank you for joining my session at the very end of the last day of the conference. I'm honored to have this speaking opportunity again and like to make it as interactive as possible after the presentation. But before I start, I just would like to give my greatest sympathy to those who are affected by the COVID-19 and pray for the whole world to wish to now see soon with the start of the vaccine distribution. Please turn to the Slide 3. Here is the agenda for today. Please turn to the Slide 5. Please -- Slide 5, please. Okay. Olympus is 101 years old Japanese company with over 30,000 colleagues around the world, making people's lives healthier, safer and more fulfilling around the world. This is our purpose, and that's what we live by every day and do business for. And we are more confident to deliver better values to the society, health care professionals and patients by resolving unmet needs through our technological innovations in both products and services. Please turn to Slide 6. Right. Our confidence can be rationalized through the divestiture of Imaging business, which was made 2 weeks ago. I was -- it was a tough but right decision to bring more focus to the medical business, which adds to about 85% of our total revenue. We are gastrointestinal endoscopic category leader, owning more than 70% of the global market. It is our biggest earnings category. And our Therapeutics business has plans in place to accelerate more growth in GI endotherapy, urology and the respiratory endotherapy areas. You would see later how our pipeline has already been strengthened in the last 12 months with multiple M&As. The growth in the therapeutic business plays a significantly important role for our future growth. Please turn to the Slide 7. Just a reminder, there are strategic goals we announced in November 2019. We aspire to deliver meaningful differentiated and innovative values to our stakeholders in order to help people's lives healthier, safer and more fulfilling. In order to achieve our aspiration, we strive to deliver growth that are comparable to the global top-tier medtech companies and to beef up our ability to invest so that we can pave the pace to be recognized as a valued partner to our stakeholders. The target growth are top line 5% to 6% and more than 20% OP margin achievement. These levels of the growth would help us sustainable growth. Of course, we might experience unexpected situation because of the uncertainty impacted by the COVID-19. As of today, however, all our transformations are on track, ensuring to deliver to the commitments by March 2023. Please turn to the Slide 9. Sorry, I lost my screen. Can I see your screen? Okay. Next is about our transformation efforts, we introduced our corporate transformation plan called Transform Olympus in January 2019, and renew the corporate strategy in November 2019. From here, I will take you through every steps we have made so far to achieve our aspiration to become a truly global medtech company. Shown here is what we have achieved in the last 12 months, and the pros are how committed we are. Please turn to the Slide 10. First, I walk you through one by one of these 4. First is about the divesture of Imaging business again, which was completed a few weeks ago. The decision to divest the business was under our corporate strategy to bring more focus to our medical business areas. Imaging Business was our legacy business for more than 80 years so that it was a very tough decision, but strategically legitimate decision. For us to build the foundation for sustainable growth, it is critical to improve agility and productivity of the organization so that we can capture opportunities at right timing. Going forward, we continue to assess the corporate portfolio based upon our -- the corporate strategy. Please turn to the Slide 12. Next is our efforts to improve operational efficiency. The Corporate Transformation plan we announced in the January 2019 as Transform Olympus, so the improvements of the capital efficiency as the critical factor for our success and get the goal of lowering SG&A of March 2020 to be equivalent to the level of March 2018, and we kept that promise. These global efforts were being continued this financial year and expecting to lower SG&A by JPY 15 billion compared last fiscal year, only for the continuing operation without Imaging Business. Please turn to the Slide 13. One of our critical success factors of this transformation is how quickly we manage the organization to be more purpose-driven organization. We have rolled out our company vision, our purpose, a few years ago. Yet, there's still a lot to do for the entire organization to embody the vision. Japanese companies are historically known to have a very close and rigid corporate cultures and systems, but that has to change. We decided to implement the recently announced organizational streamlining in Japan in order to improve our agility to respond to the needs of our stakeholders and ability to win in the global market. The program is believed to provide the greater career and promotional opportunities to those who are capable, committed and willing, regardless of age, gender and nationality, bringing in more diversity and the creativity to the workplace. Scale of the program is about 950 headcounts in Japan. And financially, it is expected to help improving profitability by addressing the high cost -- fixed-cost structure. To deliver our ambitious goal, we won't back down with the business as usual. Please turn to the Slide 14. Okay. Talking about the diversity and the professional density, this is another way of look at the progress we've made in the past years. As we strengthen the global governance and operation, we have accelerated, bringing in more global and external subject matter experts into the organization. The 2 pie charts on the left-hand side shows the percentage of changes of the non-Japanese professionals in leaderships role in 2019 and 2020. The number of non-Japanese leaders in senior leadership positions increased from 3 to 9 in 2020, which is roughly 30% of entire. We are actively promoting talents with the right capabilities to right global position from across the world. In terms of the increase in professionality density -- professional density, we welcomed the seasoned medical device experts, Dr. Ross D. Segan from Johnson & Johnson; and Daniel Khalili from [ Cantel Medical ] to lead the medical scientific affairs and the quality areas we have [ faced ] that are essential to our business. Both of them have a very strong medical and engineering background, already driving transformation in their respective functions to make us more competitive medtech company. Please turn to the Slide 16. Next, I'd like to bring you closer to our business. Okay. Slide 17, please. First and foremost, I would like to give you our take on the medical business environment. No doubt, we are being severely affected by the COVID-19 last year and expect the effect to continue for some time more. The pandemic, for sure, has changed the way we do business in the long run to some extent. But I believe the early diagnosis and minimally invasive treatment will remain high demand given the globally [ slowing ] medical expenditures with increasing age population and our offering would certainty -- certainly contribute even more to improve patient quality of life and efficiency of the health care system in the world after COVID-19. Slide 18, please. With that premises, I will take you through how we plan to grow our business in next few years. First, our Endoscopic business plan, we aim to achieve 6% CAGR from year 2021 to '23. We will strive to expand the Endoscopic portfolio by adding single-use products, while making sure to keep competitive advantages in the reusable endoscope segment. Last year, we announced a long waited next-generation endoscopic system called EVIS X1 in Europe, Japan and some countries in Asia. In addition to the system, we also introduced the Endoscopic CAD platform mountable to the system in Europe and some parts of the Asia. Together, they would soon be strong growth drivers in the business segment. Furthermore, more growth can be expected with the launch in the U.S. and China. The market maintained strong growth momentum. And I assume that recent proposals by the U.S. Preventive Services Task Force to lower the recommended starting age for the colonoscopy screening to age 45, would also work favorable -- favorably for us. As for the surgical endoscopic system, we plan to launch our leading system VISERA ELITE II in China where needs for the surgical endoscopy procedures are rapidly increasing. The next-generation surgical endoscopes are in development pipeline, and they are expected to drive our future growth. Slide 19, please. In the previous slide, you have heard my saying that next-generation GI endoscope system was launched last year. I will spend a little bit more time to give you how much growth potential the product has. The product name is EVIS X1 again, our new launch in 8 years. This EVIS X1 adopts new technologies to improve the quality of detecting, diagnosing and treating disease by endoscope and aims to increase examination efficiency. Olympus owns more than 70% of the market share in GI endoscope segment for decades and previous model sold about 70,000 units. And our assumption is that majority of the previous models in the market would be replaced by the EVIS X1. That will drive the sales. And rapidly expanding emerging market would add sales momentum with new system introductions. Please turn to the Slide 20. Next is the Therapeutic business. I expect this segment to grow the CAGR 8% from year 2021 to '23, as we would be focusing our resources in the growing therapeutic areas such as GI endotherapy, urology and respiratory endotherapy, including ERCP, which is Endoscopic Retrograde Cholangiopancreatography; and ESD, which Endoscopic Submucosal Dissection related products. Today, wide range of devices are driving sales. In the future, our plan is to add single-use endoscopes to the portfolio. Addition of the single-use endoscope would make our portfolio capable of serving to diversifying needs of the endoscope medicine, and it will certainly drive up our competitive advantages. As for GI endotherapy device, product offering would continuously be expanded to help business grow. In urology, new product launch are in pipeline. Among the new phases, iTind and SOLTIVE SuperPulsed Laser Systems are loaded with technological innovations and have great growth potential. Please turn to the Slide 21. In Therapeutic business, the must achieve is the business growth in devices in our focused therapeutic areas. And we are enriching product portfolio through acquisition of the companies with strategically fit products and growth acceleration potential. Last year, we announced Arc Medical Design and Veran Medical Technologies. Arc Medical Design owned ENDOCUFF, their leading product, which has the study to show 11% improvement in adenoma detection rate, contributes to the ensured visibility during screening. I have a very short video clip on how it works to give you a better idea of the product function. Please turn to the Slide 22 and start the video clip. The flagship product ENDOCUFF VISION is a device attached to the digital end of the colonoscope, designed to maintain and maximize visibility during your colonoscopy. Through its unique design, ENDOCUFF VISION can manipulate the large folds, anchor the scope tip during the looping reduction and stabilizing during complex procedure such as a polypectomy. Okay. Another acquisition is Veran Medical Technologies. Lung cancer is considered to be #1 in the preventive -- prevalence globally as a cause of disease. Nowadays, the low radiation CT has been widely used for early lung cancer screening. Conducted biopsy of the lesions is an immediate next step for that definitive diagnosis by inserting devices to the target area to collect tissues in the cells from peripheral areas in the lung. Veran Medical Technologies have technological advantage to deliver testing devices to the peripheral areas. You may better understand how it functions through a video clip. Please turn to the Slide 24 and start the video clip. Electromagnetic Navigation System by Veran Medical Technologies, it supports the HCPs in delivering bronchoscopes and devices to narrowly diverged peripheral areas in the lung by enabling viewing 3D vision of the [ bronchial ] during procedures. The technology is compatible with the bronchoscopes and expected to bring the synergies. Please turn to the Slide 25. Okay. 2020 was the first year since we announced our corporate strategy, and unfortunately, it was hit by COVID-19 pandemic. Managing business in the greater uncertainty has been difficult, but our purpose and our core values have united all the executive officers stronger than ever before to lead with the conviction to driving all those transformations. Our journey has just begun, and I look forward to bringing more positive news to you next year in this conference. Thank you very much for your attention, and please stay safe. Please stop the -- sharing the slide. This is the end of my presentation.

Thank you, Mr. Takeuchi. Now we are open to Q&A. [Operator Instructions] In addition to Mr. Takeuchi, COO, Mr. Nacho Abia; CTO, Mr. Akihiro Taguchi; CFO, Mr. Chikashi Takeda; CAO, Mr. Stefan Kaufmann, will also answer. So we have several questions from investors. Let me kick off with the first question from investors. So what specific steps are needed over the next 2 years to achieve 20% operating margin? This is the first question.

Okay. All right. Well, we have the plan, which I -- as I explained, the transformation programs. There's lots of initiatives which has been started since 2 -- almost 2 years ago. And it is on track, as I said. And from the efficiency improvement side, the transformation program and all the initiatives, which is more than about 1,000 initiatives, will give us the greater opportunity to improve our profitability by itself. But 20% level, the 20% of the OP margin cannot be achieved without having the sales force. The sales, the growth will -- must happen. And in that sense, the COVID-19 is a risk. But we all expect that this situation will be much better sometimes during this calendar year by the distribution of the vaccine throughout the world. And I also said in my presentation, there's a lot of the potential, growth potential in our business. We will keep adding our products not only limited to the therapeutic area, but mostly therapeutic area, but also the GI area as well. And we expect that the early -- the launch -- as early as possible launch, the new GI systems, the rest of the world that we have already launched, especially in the U.S. market and sometimes within a year or so -- within a few years, sometimes in the China market, that will give us a much better -- the opportunity to, altogether, to achieve the 20% OP margin.

Okay. And the next question from investors is, what other therapeutic areas has Olympus considered for expansion? Is structural heart and/or vascular procedures able to obtain benefit from Olympus technical know and how? In respiratory endotherapy, have Olympus like technologies to kill virus and bacteria -- like bacteria?

Okay. Nacho, I'll give you the opportunity to answer to that question.

Yes, can you hear me well?

Sure.

Yes. Okay. Well, thank you for the question. I think that in our corporate strategy is well outlined that besides obviously our current strong position in GI scopes, the other therapeutic areas that we are interested the most is urology and respiratory business. And these are the areas that we have been investing, and we believe still that our opportunity to grow that market further is very significant. And this is what will fuel the growth that Mr. Takeuchi has been explaining in his presentation. To explore other therapeutic areas is always in our consideration. But I think at this point, we should not expect any major investment in any areas, specifically in heart or vascular diseases. From one side, we might have some technology which might allow us enter that space, but we don't have the call point in the market and it will be very expensive to build it at this point. So as long as we have opportunities in our existing markets, and we believe that we can grow as the -- as our [ commitments ] has been, I think we will attain our core and therapeutic segments.

And the next question is about Therapeutic Solutions. Since the Therapeutic Solution division will mainly handle consumable items, how do you intend to expand this business? You're focusing on gastrointestinal, urology and respiratory endotherapy. What are your respective pipeline strategy for details?

Well, I have shown some of the pipeline slide, and I gave you the explanation but if again, I would like to ask Nacho, if there is any additional comment, you could be able to make.

Well, I think that in the GI, obviously, I mean, our position is already very strong. We feel that within the luminal procedures and the luminal surgery becoming more prominent, and I think there is an area where we definitely will invest and have a strong presence. In urology, there is a strong opportunity in the stone management and SOLTIVE is a great product for that area, and that is expanding very rapidly. And in respiratory, obviously, with the acquisition of Veran Technologies, I think we are in a very strong position to really be the key player in lung cancer detection and [ cauterization ]. So I think that we have a very clear outlined strategies for growth in all these 3 corporate strategic areas.

Okay. And also you mentioned in Therapeutic Solutions, seeking 8% [ sales ] there while utilizing M&A. What specific types of technologies you might consider in these 3 areas?

That's a rather difficult question. There's -- the many technologies that -- which can be the potential to our future growth. But as right spend and also the -- Nacho Abia explained, the technology such as the Veran Medical, which we acquired last year, is very -- has a very wide range of the potential to fit to our -- create a synergy. And those are the technologies. We have lots of the diagnostics that -- the solution areas. But the Veran gives us the opportunity on top of the diagnosis, the treatment. So we have the access by means of the endoscope. And if there is any -- the additional opportunity to expand from the diagnosis to the treatment like that, it will give us lots of the future potential growth.

Understood. And the next question is about Endoscopic Solutions. The Endoscope Solutions division launched EVIS X1, the first new endoscopic model in 8 years in Japan -- for the first time in 8 years in Japan, Europe and part of Asia last year. What is the launch schedule for the U.S. and China? How do you intend to raise peak sales in U.S. and Chinese markets? What do you expect to -- when do you expect to reach peak sales?

All of that question was made very unclear because of the COVID-19, I have to say, unfortunately. But as I mentioned in my presentation, we certainly expect the sooner launch in the U.S. market which is a bit delayed because of the COVID-19 for the FDA approval process. Again, unfortunately, we have to say that. In case of the China, which is that the market has been growing more than the double-digit growth in the past several years, the launch timing as it is, is a little bit different from the mature other countries like Japan, Europe and the United States. The China has not been scheduled to launch immediately. The current existing -- the generation of the system that we introduced in China several years later than the matured market. So naturally, the new -- this new system, the EVIS X1 will be scheduled in scheduled to be launched in China some years later. But it is too early to give any specific -- the timing of the Chinese product launch in this case. And peak sales, your question about peak sales. Well, in that historical pattern of the new system introduction, within about 3 years -- 3 to 4 years, that is making about the peak of the penetration of the system. Then the system -- I mean, the business goes rather flat.

Understood. And the next question is single-use endoscope. And so you plan to launch single-use scope, how will this change your income model? And also, we have a question from investors for single-use endoscope launch, what will be the advantage of the new products so that you can compete with -- for Boston Scientific and advanced technology features or price? And further -- do you need further M&A? And do you feel or do you have confidence about this competitive environment?

Thank you for your question. Okay. I would like to ask Nacho to answer to that question. And if necessary, followed by the Aki Taguchi from the technological side.

Yes. Thank you. Yes. I mean the -- our aim and ambition in endoscopy, both reusable and disposable endoscopy, is to make sure that we offer our customers, the physicians that proceed with endoscopy the best possible solution. And this has been our aim for many, many decades and in reusable endoscopy, and this will continue being our main name. So what we have to make sure is that we have an offering that covers all the potential needs. And there are -- I mean, obviously, still, the single-use market is very niche. It's small and it's focused in certain areas. It's going to grow, and we will be there in order to facilitate those products to the market. But obviously, every case and every application will require a different kind of scopes. We obviously believe that the best performance will be achieved with reusable scope for obvious technology reasons of many, many decades of investment and more there. But as I mentioned, I think there are specifics, what might exist an infection risk, it might [ fix ] emergency situation or a very specific anatomical issue that may help with disposable scope, and we will offer that solution. We are planning to launch our different products starting next fiscal year. And as I say, we will be launching pretty much based on what we believe is the market need at every given time. At a certain [ cadence ], we will bring product to the market. Regarding our technological differentiation, we would need M&A. I think that no one better than Olympus knows the endoscopy -- well, no one better than Olympus knows how to make a good endoscope. And it's also true that we have to develop, and we have to figure out certain things from a disposability perspective and our R&D team are [ working ] with that. And that's going to be a combination of our internal expertise and some external expertise either through collaborations with third parties or eventually M&A in some cases if this is necessary. But we feel pretty solid that no one's understand endoscopy as Olympus. And our products will definitely be as useful as our reusable portfolio has been for many years. These are my comments. I don't know, Aki, if you want to complement them with any from technology point of view.

Okay. This is Aki Taguchi, CTO. I think as Nacho explained, and I think our target for the disposable endoscope is we have to provide ideal platform for the all type of endoscope. That means those that are already reusables and also the disposable. I think we have then a long history about the, let's say, reusable endoscope. Maybe this is our advantage. Maybe only Olympus can provide the best platform for the all type of endoscope, which is means for the, I will say, many kinds of [ development ] set the market needs. This is one point. Therefore, you would say, we really want to focus, to establish, I will say, best platform, both for the reusable and the disposal. This is one thing. And also I would say for the technology point, for the reusable endoscope, we have done many, what shall I say, property for the [ newer ] set, a new technology features. Like NBI or RDI or TXI or whatever. Maybe for the disposables, so maybe we can utilize those technology assets. That is another advantage for us, I believe. But in any case, our target is to provide the best platform for the endoscope.

The next question from investor is, can you share outlook in the bronchial valve market outlook and your launch experience so far? How is procedure trend under COVID-19?

Okay. It's a very specific question. Nacho, can you answer that question?

Yes, I can answer that question. So this -- in the bronchial valve launch was one of the -- we launched that made us personally proud because it really fixed one of the problems -- that one of the unmet needs that for many years have made the life of patients very tough, and we have a lot of experiences and a lot of patient testimonials that show how this has been a game changer for them. So we're very proud about that. Actually, the evolution during COVID-19, it has been pretty good. I mean we have continued developing the procedure. It's a procedure, which is complex. I mean it requires education for the doctors, and we are working on that area. It's a growing market as well. It's a market that will continue growing, but it requires penetration and market development effort, and we will continue doing it. So it's definitely one of exceptional complement for our whole respiratory strategy, and then we have a lot of hope that it will continue delivering very significant growth of this has been done so far, and [ hopefully ] profit.

Okay. The next question is about governance. So how has governance improved over the past 2 years?

That's a big question. Well, let me put it this way. What is the governance? To me, the governance is the -- all the systems, which is critical to make the company success. Normally, the governance, in my mind, is -- should be owned by the executive team like us and also the controlling unit like our Board. It is critical in my mind that the executive team and the Board must work very collaboratively. In my view, the Board, I would very much -- from my standpoint, I very much expect the Board to support the executive. That's the best way how it can work, the improved governance system. And since I became the Board of Olympus 9 years ago, I am very proud to say that the Olympus governance system has improved in a big time. And since I became the President 2 years ago, I started to accelerate the diversity in executive teams and the Board. And inclusion of the value of the capital, Robert Hale, is one of the example that we -- those are the type of the talent we never had in our Board. And having increasing diversity in the Board will only give us the advantage for our executive team to have a more wide range of the viewpoint. And the governance cannot be improved in a very short time. We need to go step by step. But again, so far, looking at the development in the past several years, I am very proud and very glad that we have done, and I'm very happy at the currency situation. There's no endpoint of the improve in the governance because company has to grow, and company has to be sustainable. And that's the purpose for the governance in my mind, again.

Thank you, Mr. Takeuchi. So I'm afraid, our time is almost up. So that concludes today's session. And thank you very much. Thank you so much, everyone, for joining this session.

Thank you very much. Thank you for attending the session.