Sumitomo Pharma Co., Ltd. (4506) Earnings Call Transcript & Summary

I'm Hiroshi Nomura, the company president. Thank you very much for taking time out of your very busy schedule to attend our ESG meeting and opinion exchange meeting today. Thank you very much for your continued interest in our company's management. I would like to take this opportunity to thank you for your valuable comments and suggestions. As today's meeting is also primarily an exchange of opinions, I would like to receive your frank opinions and look forward to working with you. Thank you. This is the application for selection for the Prime Market. I am pleased to report that at the Board of Directors' meeting held at the end of last month, a resolution was passed to apply for selection by the Prime Market. In the future, in terms of high level of governance required of a listed company in the Prime Market, we will continue to work on compliance with the Revised Corporate Governance Code and other measures. We will also promote constructive dialogue with investors in order to achieve sustained growth and increase corporate value over the mid- to long-term. I would also like to talk about actions relating to the Revised Corporate Governance Code. We have been working on this area since FY 2015 to improve the effectiveness of the Board of Directors. There were 3 issues that we faced in this project last year. There is interest in more discussion on improving our corporate value in the mid- to long-term. This was the theme of last year's meeting. Last year, the Board of Directors took time to delve into various mid- to long-term issues that we were facing. We have discussed this issue 4 times. Many of the fruits of those discussions have made it into the revision of the mid-term business plan. In the survey, another topic that came up was the future makeup of the Board of Directors. We are working on this independently from the revised code, which also talks about skill sets. We had discussions on this topic at 2 meetings in the previous fiscal year. We discussed the expertise and perspectives required of Board members. In terms of ensuring the diversity of the Board of Directors, there is a need for female directors and foreign directors. There were also discussions about how to develop internal candidates for the Board of Directors. In addition to further improve the quality of deliberations at Board of Directors meetings, since our Board of Directors meetings cover a variety of major themes related to the company business, it is necessary to have a process of reading and reviewing the materials in advance. We have taken measures to establish a system that enables outside directors and corporate auditors to do this. One of the key issues for FY 2021 is to further enhance discussions on risk management. The term risk management is quite broad and we need to delve a little deeper into the individual risks inherent in compliance, information management and the pharmaceutical business itself. We would like to devote as much time as possible to these important agenda items. So we have slightly changed the criteria for important and narrowed down the agenda to those items that can be discussed at the Board of Directors' meetings. We are working on optimizing the number of topics and the time for deliberation as much as possible. And this is for the training of directors and auditors. But since there are many people who are not necessarily experts in the pharmaceutical industry, we would like to have them learn about the drug pricing systems and the insurance systems in various countries, especially in Japan, the U.S. and China, where we do business. We will also ask outside consultants to explain to us how we can strengthen country risk profiles in the regions where we operate. In addition, we would like to provide training to the Board of Directors on the current status of our DX activities. We are currently working on those projects. This is being undertaken in relation to the Revised Corporate Governance Code. As for the necessary skills of the Board of Directors, our basic policy in the Corporate Governance Code is to promote qualities and procedures for the election of the Board of Directors. It is very simple at present, and we have just revised the code to make it more detailed. There are 7 items covering knowledge, experience and abilities that directors and the Board of corporate auditors should have as a whole. The first of these is a wealth of knowledge, experience and ability as a person in charge of domestic and international corporate management and organizational operations. This includes awareness of the global situation, both domestically and internationally. If you are in charge of corporate management and organizational corporations, you have experienced an insight in areas such as governance and sustainability. In particular, given the fact that the governance is a major role of the Board of Directors, I believe that the experience as a person in charge of corporate management and organizational operations in Japan and abroad will be very beneficial. Then there is the second covering different industries. Of course, we belong to the health care and pharmaceutical industry, but we also need objective opinions from a different perspective to look at our business. The third is new businesses. And the fourth is the use of digital technology and data. In order to create corporate value over the mid- to long-term, new businesses are necessary and [ DX ] and the use of digital technology are indispensable, which is why we have included them as number 3 and 4. And fifth, professional knowledge, experience and ability related to the health care industry, I feel that this is a matter of course, for a pharmaceutical company, but it is also a matter of expertise, especially in medicine, pharmacy and health care administration. We also believe that the Board of Directors needs to have the experience, knowledge and the abilities that have been cultivated over a long period of time in the health care industry, such as our internal directors. Then there is number 6, finance accounting and taxation and number 7 law compliance and risk management. This is very basic for infrastructural functionality of the Board of Directors. In addition, companies listed on the Prime Market are required to enhance the quality and quantity of disclosure based on the TCFD or an equivalent framework. This also encourages disclosure of sustainability initiatives. We do not have a high level of disclosure at present, but we announced support for the recommendations of the TCFD last month. We are working to improve the quality and quantity of our disclosure accordingly. As you all know, we are currently aiming for a 35% reduction in Scope 1 and 2 in FY 2030 compared to FY 2017. This is on the basis of a well below 2-degree centigrade reduction. If we get the SPT initiative certification, it will be 1.5 degrees centigrade, which means that the standards will be more stringent. We are going to examine the situation a little more carefully and then decide what we are going to do in Scope 3. In the area of group governance, there's a requirement for independent outside directors for companies with a controlling shareholder, parent and subsidiary listed companies and their subsidiaries and the majority of directors for Prime Market companies. We are considering setting up a special committee for important transactions or actions with conflicting interests. Currently, 4 out of 9 directors are independent directors, which is not a majority. However, since last year, we have established a supervisory committee for conflict of interest in transactions among group companies to deliberate on important transactions that conflict with the interest of the parent company or the parent company's group companies. We believe that we are currently in a position to answer the requirements of the Revised Corporate Governance Code. This concludes my explanation. Thank you very much.

Thank you very much. My name is Atsuko Higuchi, and I look forward to working with you. I will now report and explain about the setting of KPIs for materiality and environmental initiatives. For materiality we first set and disclose this in FY 2018. Since then, we review it every year through discussions with experts. In FY 2019, following multilateral discussions, we categorize materiality items that lead to value-creation and those that serve as the foundation for business continuity, as shown here. These have been disclosed. We have set KPIs for this materiality. As we have already disclosed in the integrated report of the materialities that lead to value-creation about, we have set KPIs for the materiality that we placed the highest priority on as well as for the 2 materialities that form the basis and business continuity, employee development and environmental initiatives. I will also report on the setting of KPIs for the 2 materialities form the basis for business continuity, employee development and environmental initiatives. Topics include employee health and safety. In August of this year, we prepared and published a white paper on health to visualize the status of our health declaration efforts. As for our environmental efforts, as Mr. Nomura mentioned earlier, we announced our support for the recommendations of the TCFD last month. In May, we revised our basic environmental policy and announced our goal of achieving 0 emissions of greenhouse gases, Scope 1 and 2 by 2050. This is the process of setting the KPIs for materiality. As you can see on the right, we first updated our materiality and set qualitative targets at the management committee in July 2020 and explain them at the ESG meeting here last year. In parallel, we exchanged opinions with experts and held internal hearings with the department in charge and proceeded to study KPIs for materiality. It was not easy to finish the process in just one meeting at the management committee. So we deliberated several times reported to the Board of Directors and set materiality targets and KPIs in June of this year. We set the goal to evaluate and analyze the progress of each materiality in conjunction with the business strategy and to create KPIs that are objectively easy to understand. Overall, I think we have achieved a certain level of success, but as mentioned in the issued section, we still need to link our business strategies to social issues such as the SDGs and set KPIs that are linked to those issues. Also, what is the impact on society? What are the outcomes? And how are they set and expressed? Some of the KPIs are for Japan alone, and some are for the entire group. How to sort out these mixed KPIs is still an issue. So we would like to receive your opinions today and make the necessary revisions. Also for discussion is the setting KPIs for development of innovative products and health care solutions and contributing to the development of science. I won't explain each of them individually. But as you can see on the left, in terms of linking them to our business strategy, we have set KPIs for each of the development pipeline targets and progress for them as disclosed in our mid-term management plan and financial results. We have also set KPIs for the number of projects that have moved to Phase I and the development modality is in early stages of development before the pipeline is established. Another feature is the motivation of the R&D staff to work. We have also established these KPIs to evaluate the motivation of R&D staff. As you can see on the right, we have been conducting a company-wide awareness survey every year since immediately after the merger. We have paid attention to the items in their current surveys such as the content of work, whether staff feel responsible and worthwhile and whether they feel they are contributing to customers and society. One of the challenges is to determine the impact of launched products on society. Major outcomes in this area remain a future issue. This is KPI setting for training and development of employees. In order for the company to achieve sustained global growth, it is essential to develop human resources who can be and work on the global scale. We also believe that it is necessary for employees to become independent and think about their own careers. So we have set 5 KPIs on the left side to measure and evaluate their performance. For example, the word challenge is mentioned as a corporate culture that we would like to value. In addition to regular transfers, we also have an internal recruitment system. We have set up indicators to measure the autonomy of our employees, such as the number of hands raised in internal recruitment and the number of career consulting sessions where qualified employees provide consultations to help employees think about their careers independently. As a result, we have determined whether we are really developing human resources who can play an active role in the global arena, which is our goal. We must also aim to develop human resources with skills. And with this in mind, we are also providing DX training. This is the setting of KPIs for environmental initiatives. Naturally, we have set the 5 items listed here as what we need to work on in order to reduce our environmental impact. Next, the section in the lower right corner. As Mr. Nomura explained earlier, we have set a long-term goal of reducing greenhouse gas emissions from Scope 1 and 2 by 30% by FY 2030, and 0 by FY 2050, we have set KPIs to measure our progress towards this goal. Other long-term goals are also listed and KPIs are set to show how much progress has been made towards them. We announced our support for the recommendations of the TCFD in November, and we are now working on disclosure. Our goal is to disclose information on a non-consolidated basis in Japan by the end of this fiscal year. From the next fiscal year onwards, we plan to gradually expand the scope of disclosure to include all group companies. This concludes my presentation. Thank you.

Ms. Mishiro, the coordinator of the panel discussion has been active in corporate integrated reporting consulting, report reviews and advisory services for stakeholder dialogues. So Ms. Mishiro, please go ahead.

My name is Mariko Mishiro from RIDEAL.

Thank you for taking part today.

Before we begin the final discussion, I would like to begin with a few words from outside director Professor Atomi. Thank you, Professor Atomi.

I'm Dr. Atomi, outside Director. I am a surgeon by profession and have been involved in education and clinical research at universities. I have served as Director of the University Hospital for 6 years being of the school of medicine for 6 years and school president for 8 years. I have been an outside auditor for 4 years and an outside director for 4.5 years at Sumitomo Dainippon Pharma. I am now the Chair of the Nomination and Compensation Committee. During my nearly 9 years as an outside director and outside corporate auditor, Sumitomo Dainippon Pharma has its share of ups and downs. We can see the company's development globally, for example, through the rapid growth of LATUDA in the United States. Then again, there was the patent cliff issue with LATUDA and the subsequent cessation of development of promising drugs. There was also the issue of the lawsuit over the exploration of the LATUDA patent and the alliance with Roivant Sciences and the acquisition of 5 subsidiaries. In China, there was a governance issue. And I remember that there were problems in the establishment of the Chinese headquarters. During this period, I was deeply aware of the dedication and hard work of the Board of Directors and executive officers, led by the Chairman and the President. I believe that what I can do is to perform my responsibilities as a highly independent outside director.

Thank you very much. Ms. Arai, please go ahead.

I am Saeko Arai, outside Director. Thank you. As a certified public accountant, I have provided accounting and auditing services. And as a co-founder of an IT venture company, I have been involved in the startup of venture companies. From that background, I am now supporting venture companies. I also provide training and development in financial accounting and auditing to improve accounting literacy for executives, professionals and students. As an outside director, I monitor and comment from my experience in auditing and venture management as a professional. And from the perspective of minority shareholders or patients. Thank you. And I have also served as an outside director for about 4 years. I am also the Chairman of the Supervisory Committee for conflicts of interest in transactions among group companies.

Thank you very much. Mr. Endo, please go ahead.

I am Nobuhiro Endo, the Chairman of NEC, and I serve as an outside director. My background is in business management. Also, our company is in the manufacturing industry. From that perspective, I think I am expressing my opinions from the perspective of the manufacturing industry and from the perspective of company management. In particular, business risk, governance, and since we are in the ICT industry, another focus is how we should value creation be from the prospective digital technologies. I am expressing my opinion on this point of view. I would like to thank you for your cooperation today.

Then Mr. Usui, please?

Hello, everyone. I am Minoru Usui, Chairman of Seiko Epson Corporation. I have been serving as an outside director since June of this year. I have worked mainly in the research and development field at Seiko Epson. I invented Epson's Inkjet printhead and have led its development. During my 12 years as President, I have implemented various structural reforms in the company. I believe that I will be able to make good news of that experience here. More importantly, since we have a corporate structure that is based on R&D, I hope that I can make good use of my experience that they have cultivated over the years. At the same time, I would like to contribute to the experience and governance of businesses that are expanding globally. Thank you.

Next, Mr. Tada, please.

My name is Masayo Tada. We have a parent company that owns more than 50% of our shares. And we are listed as a subsidiary company. We believe that the most important governance issue is to have minority shareholders recognize our independence from the parent company. In this sense, in order to be recognized, we need to manage our business from the standpoint of minority shareholders. And for us, minority shareholders are represented by investors like you. I believe that is listening carefully to your opinions and requests and reflecting them in our management policies will lead to the resolution of issues. I believe that for many stakeholders, including shareholders, the first and foremost step in ensuring that management is conducted under proper governance is for the Board of Directors to properly fulfill its responsibilities, including supervision, guidance and support and for the corporate auditors, and the Board of Corporate Auditors to confusion properly. In addition to this, we believe that it is extremely important to enhance the transparency of management intentions, and the status of execution through adequate information disclosure. It is also important to receive frank opinions and guidance through dialogues with minority shareholders at the General Meeting of Shareholders. Q&A sessions at various briefings with investors and analysts and needings to exchange opinions with labor unions. For this reason, I believe that dialogue with management is extremely important and meaningful for us. And as Mr. Nomura said at the beginning of the meeting, I would appreciate your comments and suggestions. Thank you very much.

Thank you very much. Now let us begin the discussion. Today, I would like to focus on 2 major things and explore them in depth. We conducted the questionnaire of investors and ask them to name a number of things, but I would like to focus on 2 of the most interesting things. The skill sets of executives and human resources. The first topic is skill set. What kind of skills are executives expected to have in order to improve corporate value over the medium- and long-term? And the Sumitomo Dainippon Pharma has a full gamut of skill sets among its personnel, who made the decision about the skill set and how? I would be very interested in hearing about this point. First of all, Professor Atomi, Professor Atomi, you are the Chairperson of the Nomination and Compensation Committee, and I would like to ask you to give us an overview of the skill matrix on Slide #16, the document that has been distributed to you.

As Ms. Mishiro just mentioned, I will explain as the Chairperson of the Nomination and Compensation Committee. In the regulations of the Nomination and Compensation Committee, it is stated that the committee should be consulted by the Board of Directors and should consider the matter so the Nomination and Compensation Committee discusses the matter. And finally, the Board of Directors deliberates and makes a decision. First, the skill matrix. I am sure that you are all much more familiar with this than I am, but we have had a series of sincere discussions on this. The focus is that this is an announcement of what kind of system the Board of Directors have in place to realize Sumitomo Dainippon Pharma's goals, ideal Image and management strategy. I think the skill sets can be broadly categorized into what is required by general listed companies. And what Sumitomo Dainippon Pharma should aim for. This list will give you an idea of that. As an aside, I have also included the main background and expertise here so that you can understand why each item is circled. The initial list was 20 or 30 items. But we review them and decided on the ones you see here. There was a lot of discussion about the creation of new businesses and the use of this digital technology and data, especially in the area of different industries, which was explained earlier by Mr. Nomura. In particular, the Internal Directors made a strong statement regarding this, which I believe will be explained by directors, Arai and Endo. Also, as I mentioned earlier, the percentage of overseas companies is very high. We also spent a lot of time discussing how to handle international things such as global management. And the fact that profit margins are very high overseas. As you can see from the main background section, most of the directors at the head office have overseas experience with corporate experience. In the first column, corporate management and organizational operations in Japan and abroad, we have indicated that this is not only for domestic use but also for international use. As you can see here, we have taken up 3 areas of health care industry which is unique to Sumitomo Dainippon Pharma. We believe that Sumitomo Dainippon Pharma will have to respond quickly and appropriately to changes in management strategies and other factors. That's all.

Thank you very much. Mr. Tada, as the Chairman of the Board, do you have any additional comments on this one?

I think the process is as explained by Dr. Atomi. But if you look at the current members of the Board of Directors, they cover a very wide range of functions and knowledge. And of course, several are from outside the company. I have not explained much about our domestic operations, but we have a group of people who have the experience and knowledge in the 6 core functions of our business. Research, development, production, engineering, sales and quality assurance. Because of this structure, there are always discussions that come up from somewhere in the Board of Directors' meetings. And what I struggle with the most is how to keep them within the time limit. In this sense, one of the things for improvement this time is to reduce the number of agenda items to be discussed at the Board of Directors' meetings. This is why the current Board of Directors is not just a skill matrix but also a structure that allows for very serious discussions about the future of the company, its current improvement and measures for the future. This is a focus for us at present. Thank you.

Thank you very much. I think the group is made up of people with very diverse backgrounds. Next, I would like to ask Ms. Arai about 1 of the items in these skills matrix, which is the creation and nurturing of new businesses. As the name suggests, this item is one of the most important skills for creating future value. And I would like to know how it was added to the skill set and why it is important?

Now let me explain. Our intention in listing the creation and cultivation of new businesses and business development separately is to emphasize the importance of creating and cultivating new businesses and business development. It is important to connect the pipeline in order to achieve sustained growth and increase corporate value. If you look at this skills matrix, you will see that the circles items are technologies such as pesticides, wireless communication, MEMS, et cetera that were developed outside the company. Here, the names of directors with experience in developing new businesses through research and development are circled. On the other hand, internal directors who are working on or have worked on new businesses such as research and development are circled, as they are positioned in planning or marketing, for example, in the health care industry. If you look at it in light of the main background and expertise, you will be able to understand. In the area of new business creation and cultivation, we are developing on 2 axes: Those that emerge from within the company and those that are brought in from outside. In terms of our own initiatives, we are creating new business plans one after another in the corporate form centered around frontier businesses. There are company-wide movements centered on the frontier business that was established in FY 2019. I am sure that some of you have attended the briefing on that. In terms of creating new business value, by combining the value of the company with the value brought in from outside the company, recently, we have been working in the pharmaceutical field. At the same time, we have acquired tools and engineers for a platform using data analysis engines, such as DrugOme. I think that is a good example. In frontier businesses, in addition to biotech ventures, we are also working with so-called tech ventures, such as Pixie Dust Technologies to develop convenient and healthy lifestyles for healthier tomorrows, using people and technology. In the case of these particularly large alliances. We have received detailed reports on the background and details of the alliance at multiple times in advance and at Board of Directors' meetings. As a result, our resolution has been agreed. In this process, active discussions are always held from various perspectives. Also, this is, I think, a company-wide trend, especially with regard to new businesses. The ability to do things properly, which is a guideline for action. I personally feel that this ability will be taken as CHANTO and implemented exactly. That's all.

Thank you very much. You talked about the importance of combining new and different perspectives from outside the company with those from inside the company. And I think this can be set for digital as well. I would like to ask Mr. Endo about one of the unique aspects of the matrix, namely the use of digital technology of data. I think your DX efforts are accelerating with the alliance with Roivant Sciences. And I would like to ask you about the significance and the importance of DX for Sumitomo Dainippon Pharma.

Thank you very much. I don't think it's just pharmaceutical companies as Sumitomo Dainippon Pharma. Nowadays, people are talking about the DX, but I think that all of us, value-creating companies need to be aware of the original direction of DX. I think the biggest thing that will change with DX is that what used to be hardware decisions will become software decisions. To use a simple example, if the hardware decision is to say, that the car will go forward when you step on the gas pedal. Then when you step on the gas pedal too hard, the brakes will be applied because you think that is not right. I think the basic principle of DX is to be able to apply the brakes even though the hardware is on the gas pedal. That's why I think the essence of DX is to collect data well and use it to create value. For software decision-making, I think it is very important to be able to collect a large amount and wide range of data. Of course, being able to collect data in your own company is one of this company's strength and having the ability to access and access data is another big strength. In any case, we are in the midst of society 4.0, the information society. Information is also created from data. But since information is created from a subset of data, there is a limit to create value that can be created from information. Only so-called partial optimization-type answers are available. However, by working with data, it is possible to create holistically optimized solutions because it is possible to use a wide range of data as a social value. I think this means that we will have to make a big change in the future, especially in the case of medicine. I think it is very important for value creation in the future to know whether the company is focusing on this area or not. Or with the process itself incorporates such a data-centered development process or not. I think such decisions should be actively held in the Board of Directors. Therefore, we discussed the possibility of including them in the skill sets. As I mentioned earlier about Roivant Sciences, Sumitomo Dainippon Pharma itself has been making very aggressive efforts. Although Roivant Sciences was a very aggressive M&A -- expensive M&A. I believe that Sumitomo Dainippon Pharma gained a very high value from it. Regarding digitalization, it is very important to move quickly. Sumitomo Dainippon Pharma has about 30 DX personnel, but about 20 of them, more than 2/3 are career hires. So in addition to cultivating their own business. They are also making an effort to recruit talented people to start up their own business right away. Actually, yesterday, I attended a 4-hour briefing on production technology outside of development. Data is collected in the production process and multiple decisions are made based on specified failure models -- failure modes. These production lines produce 500 million tablets per month. So it is paramount to prevent failures. You have a production line with tremendous capacity but you cannot let even one of them go wrong. Yesterday, I was able to confirm that you are actively using data to maintain the quality of your platform and the interpretation of the process is continuing. This includes the value that comes out of data and even the data itself. In that sense, I am very encouraged that you're continuing of your efforts. That's all.

Thank you very much. Now I would like to take any questions related to the topic of skill sets.

Let me ask you a question about the skills matrix. In recent years, there have been a number of companies that have included sustainability in their skill matrix so that people who understand sustainability are included, I think this is a new and intergenerational concept. I think it will be better if these things were built separately as part of the skill metric. If you -- if I had to categorize them, I would say that they are legal, compliance and risk management. And I think it would be a little different if sustainability were to be included in rather defensive category.

Thank you for your question. Sustainability together with governance, as mentioned earlier, is a very important aspect of management. As for your suggestion that it will be better to separate it. I believe this pertains to both domestic and international management as well as organizational management. This was mentioned earlier, and I think it appears in Page 18 of the appendix. The second mark extensive knowledge, experience and ability as a person in charge of corporate management and organizational operations includes governance and sustainability. This is a little different from the opinion that it would be better to separate it. But I hope you understand that we are conscious of this skills set.

The time access of corporate management is a little different now. There was no such concept as 2050, if you look 10 years or 20 years ago. In addition, if your company is aiming to obtain the SBT certification for environmental-related matters, I think it would be better to separate them a little bit. I also think if be better to separate this element when appointing outside directors in the future. This is just 1 opinion, but I would just like to add that looking from the outside, this appears to be a sensible approach. That's all.

Indeed, this is an important point.

Thank you very much. I would like to move on to theme 2. Theme 2 is about human capital in order to increase corporate value over the medium- to long-term. How do we acquire and develop human resources that are helpful to the company? And what result in outcomes that we aim to achieve as a result of this development? I would like to ask you about this source of value creation, which will have a significant impact on future information focusing on what you have accumulated so far? Mr. Nomura, first of all, the integrated report has a lot to say about human resources, but I would like to ask you to share your image of the kind of human resources we are looking for as a source of creating value unique to Sumitomo Dainippon Pharma.

The image of the kind of person we are looking for has changed from time to time. As for the type of human resources we are looking for, I think we are looking for people who are self-disciplined, independent or individuals and who can bring about innovation by involving others. To put it another way, recently, we have been running initiative called CHANTO, which is about the ability to do things properly. When I say the ability to do things properly, I mean that as an employee, you should have that ability. It means that you should become an employee with such power. What kind of employees are they? As I said earlier, they are people who can bring about innovation. And in short, there are people who will take on lofty and challenging goals. As a company, we work as an organization and we confront difficulties by involving others as an organization and discussing various issues, including what methodologies to use. We have a diverse team, and we place great importance on the need to listen carefully to all opinions. We respect each other's opinion. We're considering the kind person who will be able to commit to the final results and produce results. We are now working on the CHANTO internal activities initiative so that such human resources will emerge. However, although we will commit to the project and aim to produce results in the end, it does not mean for sure that we will succeed. The point is that we are trying to achieve a very challenging goal. So for us, it's not just about success, but also about good failure. In other words, we want our employees to do their best so that they can learn from their mistakes and we will place value on mistakes that lead to new path. I envision a person who is capable of doing such things well.

Thank you very much. Autonomy, and the spirit of challenge are key words that have been mentioned, but I would like to continue with Ms. Higuchi, I would like to ask you about your company's human resource development system to achieve the image of people and human resources that you mentioned and the resulting outcomes.

It is difficult to measure whether human resources have been developed or not. And I mentioned this as an issue earlier. The basis of human resource development may be the same in any company, but I think there is importance on-the-job training, learning on the job, being nurtured and growing independently. In that sense, I think it is very important to educate the direct manager and for the manager to find and develop people. So in that sense, manager training is very important. I know that training alone is not enough, but we are putting more efforts into training than in the past. In addition, as Mr. Nomura mentioned about CHANTO on Page 21, the 7 executive officers had a discussion on what kind of ability it takes to do things properly. We have identified what elements we should consider, and we are now trying to expand this throughout the company. In addition, although it is difficult to express qualitatively, we will incorporate it into personnel evaluation and make sure that we do everything right. We are also working on how to incorporate points, such as setting high goals and making good mistakes into personal evaluation and how to make them more widely known. As for the overall resource development system on Page 20, as shown here, the leftmost column is for training by layer. And in particular, we are strengthening the trading for group managers. In the area of digital, there will be training to raise the level of all employees and training for all managers. We also offer a higher level of training. As for the word leader, as I have mentioned before, we have a management school at the top that trains people who want to become managers, and we also nurture talented people in each of these areas. These are many more things to -- There are many more things to talk about in this area, but I think that suffices as a summary.

Next, I would like to ask Mr. Kimura about research and development, which is one of the most important aspects of human resources and determines competitiveness. Could you tell me more about your company's unique R&D structure, research project system and Virtual One Team initiatives?

As shown in the figure on Page 19 of the preliminary materials, the research project system and the Virtual One Team initiatives that we are currently adopting in the Research division are producing very good results, and I would like to briefly explain them. The project system is a term that is often used in the course of various jobs. But the research project system that we have adopted in our research means that when a research or drug discovery theme is proposed, in most cases, 2 or 3 people discuss it. And when a young person comes up with an idea for a theme, we assign a person with such passion as a leader. As the team becomes larger and larger, 2 people become 5, 10 and in many cases, more than 20 people. And after the non-clinical research, we may enter the clinical stage. In this process, the leader also has the right to execute the budget and evaluate the personnel and negotiate with other departments while carrying out the project. On the other hand, in the past, the line has become -- has been more of a management role. And now it is more of a support role for young researchers who are passionate about their projects. In addition, we will be focusing on the approval of the budget. However, for the past several years, the actual leaders have been transferred to the clinical development to meet the development. Virtual One Teams, a group of people who are interested in a particular topic such as neuroinfalmmation or accumulation of proteins such as amyloid proteins. It isn't related to the vertical structure of other projects. and instead joins people with shared interest to discuss various issues and develop themes from these discussions. One of our criteria is nomination which is the process of identifying candidate compounds for development. And last year, we received a record 7 candidate themes for development. One of the things that we have noticed is that young researchers could go back to their universities and tell their juniors about Sumitomo Dainippon Pharma's project system for a Virtual One Team initiative. Many job applicants said that they wanted to work in such a system. The fact that they are saying that they want to become leaders as soon as possible is very impressive to me.

If you have any questions on theme 2, human capital, I would like to hear from you.

I'm sorry to interrupt your discussion, but in a pharmaceutical company, the President understands the R&D theme and makes proper comments on it. It is obvious or at least indisputable that promising such things properly is the fundamental growth engine for pharmaceutical companies. Even if you say that this is a wonderful thing, I think it is something that we have seen and heard in every pharmaceutical company. It is impressive that a record 7 compounds have been nominated. If you take that fact alone, it is very revolutionary. But how does it compare to the past? Can you show us all the data? A research team at Sumitomo Dainippon Pharma Co., Ltd. has been excellent ever since the base of the former Sumitomo Pharmaceuticals. They conducted a lot of advanced research in patent applications and came up with new discoveries such as semaphorin, which did not exist before. However, in some cases, this did not result in the development of products. I think this has been a problem for Sumitomo Dainippon Pharma in the past. So I would like to know what has changed and what has become better? Can you please explain about this?

Thank you very much for your comments and suggestions. This is Toru Kimura. I was involved in the semaphorin project. And the biggest difference between the current and previous projects is that I have to explain the passion of the research or the nature of the results -- of the research and then receive approval or in the case of moving forward with research, to receive approval for clinical development. In addition, it took a lot of time and efforts to transition from Phase I to Phase II of the clinical development process. It takes a lot of passion and energy to achieve that. As a result, I think one of the factors was that it took a long time. However, with this system, the same people will keep moving forward. It's not just a matter of people working together but also collaboration between departments. I am aware that the movement is very different from the line is firmly grounded so that it can proceed smoothly. As you know, it takes a very long time for pharmaceutical or drug discovery candidate to become a real product or a drug. So it may take some time for it to reach the patients and they may have to wait. As I explained earlier, there is a big difference in the sense of the field. One thing I would like to add is that the research on semaphorin is the basis of the regenerative medicine that we are currently promoting the team, the network and the science and now being applied to regenerative medicine.

In addition to the KPIs that you introduced today, I would like to ask you about human resource development. I felt that you have not fully incorporated the perspective of human resource development into the most important materialities, such as the development of innovative products and contributing to the development of science. While completing projects properly with CHANTO is set as a theme, if the number of programs transitioning to the next phase is important, I fear that it may be possible for people to progress even if the quality is not necessarily high. I think it's more likely that the numbers will be attained, but it is not accompanied with quality. It's possible to get stuck in the next phase. Human resource development for its own sake may not reap the intended reports. I believe that human resource development should be utilized to achieve the most important materialities in work. You can set KPIs that reflects corporate culture we want to create and the challenges you have accomplished. I wonder if there are any more creative ways of selling KPIs incorporating this into the materiality of this project, such as in the area of innovative drugs creation and medical solutions. I would like to ask you to introduce the discussion in the process of setting these KPIs.

In terms of human resource development of research, as Mr. Kimura explained earlier, we have a project system. So even people in their 20s can become project leaders. In this way, these young people will become leaders and manage budgets themselves. We also do personnel evaluation. Otherwise, there will be no centripetal force. That's how groups are managed. And it's like running mini ventures, a kind of startup company. In such a situation, the project lead gets more experience in the process of carrying out the project. In that sense, in terms of talent development, although it is on-the-job training, I think this has been a very valuable experience, most people who have been a project lead have grown tremendously. Therefore, although there may be some lag depending on the compound, the fact that the number of layers has increased as a result of the project leaders efforts is true that the abilities and experience of the project leaders and the people supporting the project leader have improved dramatically. You pointed out that it is natural for the President and Chairman to attend the research report meetings. But if we compare the report meetings of some years ago and the recent ones, we -- when the project system was introduced, the faces of the researchers are more likely and passionate. This is totally different. In this sense, we feel that the efforts experience and abilities of researchers have improved considerably. But of course, people outside the company don't have the opportunity to attend such events. So I cannot tell you that much. However, it is important for you to understand that people behind the rise of the layers are the ones who are driving it. Of course, we can see the clinical part of the research, but the research part is still subject to a lot of confidentiality issues. So it is difficult to disclose. I like to be able to express that somehow. But for now, I think a fair substitute is notification, when candidates move to the next stage of research.

I think that research activities not being developed into products is for offer. However, I would like to say a few words about this issue of research not being developed into products. In particular, what steps we are taking and how we are reflecting on this path. In the past, there was a barrier between research and development. And once the compound entered a clinical phase, the development staff suddenly took over from the research staff. However, in our new system, from the late stage of the initial research, the development staff join the team and work on the project. They give their opinions from the developmental perspective to enhance future work. This project system was not explained earlier, but we are hoping that this will be one of the ways to reduce the number of lost compounds in development. We are working on that as an area for improvement. I can understand your frustration because it takes so much time. And it is difficult to come up with a product I would like you to understand that we are making efforts in this sense.

Thank you very much. I would like to end the panel now. As we are out of time. Thank you very much for your comments and suggestions.

I would like to ask people outside the company about the recent comprehensive alliance with Otsuka Pharmaceutical. We have heard the company's explanation in the second quarter. So we understand the company's opinion. However, some people in the stock market, and I agree with them, think the price was a bit low. There is a part of me that cannot shape the impression that this is something of very great value. What I would like to ask is how much is the people outside the company agree with the company's explanation during the discussion. I wonder if some of you were not so convinced. I would be helpful -- it would be helpful if you could share information about that, including what discussions took place.

The drug's co-developing with Otsuka Pharmaceutical are promising drugs. We have been looking forward to the next drug for several years. As for your question, I was fully in agreement at the Board meeting. I think it is important to consider what has been invested in the current Roivant Sciences relationship and so on and consider suitable Sumitomo Dainippon Pharma's financial situation. We're also considering several companies to partner with that have expertise in the U.S. It was also noted that both of them can cooperate in the commercialization area, which are found to be true. When it comes to selling at the discount, I feel that it was an appropriate tie-up considering that it was an urgent matter, and we have to proceed with it somewhat quickly. Thank you.

I'm not very experienced, but I was also convinced as I listened to the discussion, considering that it takes a lot of money and time to approve a drug for a single case, I thought that the more powerful drug is, the better it would be to move to increase indications as soon as possible. In any case, once the patent expires, it becomes almost worthless. So if it is a good product, it would be good for Sumitomo Dainippon Pharma to get as many cases as possible, as quickly as possible and make it useful to society. Thank you very much. In other words, people outside the company were convinced of the economic argument as well, right? I learned a lot from your discussions. Thank you.

I have 2 questions for the outside directors. Regarding the effectiveness of the Supervisory Committee for conflict of interest in transactions between group companies. Do you think that this is actually a scheme that is beneficial not only for Sumitomo Dainippon Pharma but also to the parent and subsidiary listed companies. Please comment on this point. That's my first question. I would like to ask Mr. Endo about the other point, Mr. Endo from the standpoint of NEC, you have been involved in the parent subsidiary listing of subsidiaries. While at Sumitomo Dainippon Pharma, you have been playing a role in protecting the interest of minority shareholders. I would like to hear your comments on the parent subsidiary listing of Sumitomo. These are my questions.

I will respond to the first point. The committee discussed with the parent company, first of all, about the legitimacy of the project. Whether it is reasonable and in accordance with the objectives and mainly about whether it would be harmful to the interest of minority shareholders as a transaction with the parent company. We also report to the Board of Directors. For this matter, we consider the establishment of S-RACMO, a joint venture with Sumitomo Chemical in FY 2020. In this regard, I believe that the committee was able to discuss that issue from a very impartial standpoint, since it is composed solely of outside directors. In that sense, I think it will be effective. in the case of transactions with conflicts of interest between parent and subsidiary companies. In the future, we will look at the process as well as individual cases. I'll be supervising them. Thank you.

Could you clarify the question, please? In general, parent subsidiary listing are not good for the world. On the other hand, Mr. Tada said the first and foremost point of the governance is to have minority shareholders approve the parent subsidiary listing. From that standpoint, I would like to ask you what you think about the significance of Sumitomo Dainippon Pharma's presence as a listed company.

I think the parent subsidiary listing came about as a way to strengthen the capital of the subsidiary when it became more capable of creating value. In that sense, Sumitomo Chemical is now the parent company. And Sumitomo Dainippon Pharma is not going to be listed as an independent company, but rather as a parent company. However, I am sure that the actual technologies at Sumitomo Chemical processes, including its production technologies are very useful for Sumitomo Dainippon Pharma's development. So in that sense, I personally feel that the current parent subsidiary listing is a good use of the advantages of both companies. However, if Sumitomo Dainippon Pharma wants to grow in a big way in the future, it certainly seems it will be more capable of obtaining capital. In such a case, I feel that whether the parent subsidiary listing is meaningful or not, it's a different question. However, from the perspective of successfully using Sumitomo Chemicals technology, at the current scale of Sumitomo Dainippon Pharma, I have a feeling that the parent subsidiary listing may be one of the steps in the process.

This may be a slightly different theme is time. But I think that ESG in the pharmaceutical industry has expanded and improved a lot in the past 2 years. I'm sure that your company was one of the first to take the initiative. But when I look at the value reports of other companies, I found that almost all of them were heading in the same direction. It makes sense to bring up issues such as climate change and greenhouse gas emissions since they happened to come up this time. But I feel that the social mission of pharmaceutical companies is to improve the quality of life for patients and their families by providing new drugs as quickly as possible. If this trend continues, I'm concerned that too much stress will be put on ESG, and then the focus simply becomes sustainability. I think it is also important to present KPIs that focus more on the regenerative medicine initiative that your company is working on, for example. Also in the area of talent development, I think one of the KPIs would be publication of scientific papers. I think this is near equal and may be connected to the protection of intellectual property. So what do you think about ESG in your company and in the industry in the future? As a doctor, it's also related to the outlook, is it? If you think about climate. It's not particularly related to development either. I would like to ask you what you think.

I'm not sure about how to comment as a doctor. To be honest, I wondered at first about how these keywords such as environment, social, governance came to have such significance. In particular, I wondered about how it came to be that some funds invest according to these principles. This may be my fault as a scientist but I always want to see the evidence supporting these things. That's the part that can sometimes be an obstacle for me. Although it was not discussed today, there is a revision to the compensation system that requires higher incentives, and they are being restrict about it. The question is whether or not increasing incentives will improve company performance? I have asked the secretary at many times, if there is any concrete evidence for this. The evidence is not very clear. From the perspective of a scientist, an individual's opinion is the lowest level of evidence, regardless of whose opinion it is. I think it's important to be guided by evidence. Therefore, I feel that there is a responsibility to explain the true meaning of ESG based on scientific evidence. I'm sorry if this was a digression, this is what I feel that's all.

Thank you very much. Given the new format of this meeting, I'm not sure about the atmosphere there. So I apologize if my question is a little tone deaf. As mentioned in the previous question, the deal with Otsuka Pharmaceutical had various impacts. One is that your company's profit will be cut in half. But on the other hand, working together with Otsuka Pharmaceutical, profits are also likely to increase in the future. As a result, the share would increase. This is the underlying logic. The same is true for both Roivant Sciences and Otsuka Pharmaceuticals. As a result, even though we are in the era of alliances, there are more and more projects that your company cannot control 100%. So it is difficult to see how much profit your company will lose as a result. I'm not trying to make any point by saying this, but rather, I think that the case that this will be a net plus for the company could perhaps be in stronger terms I would be grateful if you could say more on the topic of how the pharmaceutical - Otsuka Pharmaceutical and Roivant Sciences deals will ultimately benefit your company.

Thank you very much. I understand that this is a comment rather than a question. I think that I am responsible for the fact that this has not been fully conveyed, even though I have tried to do so. I would like to think about how to explain it a little more in the future. It is true that we are the majority shareholder of Myovant, a subsidiary of Roivant Sciences, but the issue of control is difficult given that it's the listed company. Otsuka Pharmaceutical is 50-50, so I can appreciate why that may seem difficult. Since Myovant is a listed company it's difficult for me to comment on it. As for Otsuka Pharmaceutical, it may be difficult given the type of contract with a U.S. company, I thought it would be difficult to move forward because of the conflicting interest of both parties. Fortunately, I was able to talk with President Inoue of Otsuka Pharmaceutical. And although we are 50-50 in this area, we are really aligned. So in that sense, I don't really see the advantages of not having that kind of control rather having consensus, we can move forward firmly. I believe that this is the kind of contract that we have. So I don't think there is any concern about what we might lose by not being able to control it. That's all.

This is Masayo Tada. This is related to a comment earlier that research activity is not being developed into products. Otsuka Pharmaceuticals development capability is very high in this field, there is an expectation that by combining our power with their capability in development, we will be able to succeed. So it is true that if you only look at the numbers on the chart, people may talk about profit and loss. But in the end, the amount will be based on success. In aiming for success, we see them as partners of whom we can expect a great deal. In this sense, I would like you to understand that we are thinking about how to utilize external power as one of the themes in our management. As we suggested earlier, we need to strengthen our development capabilities, not research. I hope you understand that this deal was made after considering how to cover not only the parts that appear in the numbers but also our weaknesses and other factors in the background. [Statements in English on this transcript were spoken by an interpreter present on the live call.]