Japan Lifeline Co., Ltd. (7575) Q2 2027 Earnings Call Transcript

Hello, everyone, and thank you for joining Japan Lifeline's second quarter and first half earnings call for the fiscal year ending March 31st, 2027. I'm Takeyoshi Egoa, Director and CFO. Before we dive into the numbers, I want to take a moment to express my sincere appreciation to our dedicated employees. Their relentless commitment on the medical front lines and agility in meeting clinical needs have driven our strong commercial execution, Enabling us to achieve record-breaking first-half net sales. Now let's get right into the financial results. Please turn to slide four for our first-half highlights. During the first half, we maintained exceptionally strong momentum across our business, driving net sales to a record high for an interim period of 31.35 billion yen, up 7.1% from a year ago. On the other hand, because we prioritised upfront growth investments like R&D, operating profit landed at 5.46 billion yen, down 17.4%, and net income came in at 4.43 billion yen, down 7.2%. Let's break down the key drivers into external and internal factors. On the external front, as a positive dynamic, procedure volumes for atrial fibrillation, or AF, grew by roughly 10%. As a headwind, we absorbed the impact of the reimbursement price cuts implemented in June of this year. Internally, on the commercial side, our core product lineup and new therapeutic areas both expanded robustly, driving our top-line growth. On the profit side, we saw higher raw material costs, as well as increased SG&A expenses, particularly for personnel and R&D. Additionally, one-off items weighed on profitability, specifically M&A expenses tied to the acquisition of US-based cross vascular, along with the absence of the bad debt reversal we recorded in the same period last year. Our full-year earnings guidance and dividend forecast remain unchanged. As announced in Q1, we have decided to pay an interim commemorative dividend of ¥25 per share, as planned. Please turn to slide 5 for our consolidated profit and loss statement. As mentioned, while net sales hit an all-time high, operating profit declined. Our proprietary sales mix rose by 210 basis points to 57.2%. Conversely, gross margin narrowed by 250 basis points to 57.5%. While our new proprietary RF transeptal wire performed exceptionally well, this margin compression was driven by higher manufacturing costs, including raw materials and labour, as well as lower average selling prices resulting from promotional activities for new products. SG&A expenses increased 14.8% over the As a result, operating profit declined 17.4% to 5.46 billion yen, with the operating margin down 520 basis points to 17.4%. Net income came in at 4.43 billion yen, down 7.2%, showing a milder decline than operating profit thanks to non-operating and extraordinary items, including valuation gains and gains on the sale of investment securities. Additionally, our international sales mix stood at 2.5% and basic EPS was 63.15 yen. Slide 6 provides the bridge analysis for our 1.15 billion yen decline in operating profit. Looking first at sales and cost factors, a powerful volume effect from robust domestic sales delivered a 1.52 billion yen positive contribution. Both our existing therapeutic areas, adding 1.07 billion yen, and new therapeutic areas, adding 452 million yen, demonstrated On the other hand, the net price effect created a 1.05 billion yen drag. This was driven by a 493 million yen negative impact from higher unit manufacturing costs, alongside a 454 million yen hit to selling prices from new product promotions and reimbursement price cuts. Turning to SG&A, recurring operating expenses like personnel and outsourcing rose by 586 million yen. On top of that, growth investments added 637 million yen in expenses, led by active R&D programs and setting up the OEM line at our Malaysia factory. One-off factors totaled 390 million yen, mainly for aforementioned bad debt-related and M&A-related fees. To sum up, while sales volume grew strongly, operating profit was impacted by price pressures and our conscious choice to prioritise upfront investments for long-term growth. Moving to slide 7, which tracks our progress against full-year guidance. We achieved 49.6% of our net sales target, 51.1% of operating profit and 55.4% of net income, tracking ahead of plan, particularly on profitability. However, this upside was mainly due to the Timing of expenses, such as delayed R&D spending. Because we expect these costs to be incurred during the second half, we have kept our full year guidance unchanged across all lines. Skipping ahead to slide 10, let's look at net sales by therapeutic area. Total net sales grew by 2.06 billion yen over the prior year. Existing cardiac areas contributed 1.28 billion And new therapeutic areas added 820 million yen, showing balanced growth across the entire business. Top-line expansion was led by gains of about 1.5 billion yen in EP ablation, around 500 million yen in neurovascular, and roughly 300 million yen in gastrointestinal. Starting from slide 11, I'll provide some colour on our individual business lines. In Cardiac Rhythm Management, or CRM, net sales declined 7% compared to last year. The competitive landscape intensified from Q1 into Q2, leading to increased pressure from rival offerings. Our core SICD line posted a 7.1% decrease, impacted by a competitor's newly launched product Gaining ground in de novo implants. Pacemakers also remained under pressure, down 10.5% as competitor leadless devices continued to capture share. While we expect these competitive dynamics to persist for some time, we anticipate an increase in SICD battery replacement cases. For pacemakers, we expect this year-over-year pressure to gradually ease and run its course through the second half. Please turn to slide 12 for EP ablation. This segment delivered robust double-digit growth, with sales up 10.3%. Our core intracardiac defibrillation catheters grew 6.4%, backed by solid expansion in AF procedure volumes. While unit volume jumped roughly 10%, revenue growth was slightly moderated due to promotional bundling discounts with our new Vascular closure maintains strong momentum, climbing 21.8%, as penetration across target accounts is now largely complete. We expect another leg of growth in the third quarter thanks to the indication expansion for large bore sheaths. On the contract side, our exclusive distribution agreement for vascular closure runs through March 2027, followed by a one-year We are actively aiming to extend this partnership further and are currently in constructive, forward-looking discussions with Hemolytics. And, excitingly, our new proprietary RF transceptal wire, ZeroStar, is penetrating the market faster than expected, reaching a 50% market share by the end of September. With the number two player at around 40%, we successfully captured the top spot just six months after launch. Turning to slide 13 for cardiovascular. Sales grew 4.1% in a stable market environment. Arcor frozen elephant trunk, or FET, achieved a 4% increase, driven by a continuous product mix shift toward higher ASP integrated graft models. Abdominal stent grafts, or EVAR, also Also performed solidly, up 7%, supported by a rebound from last year's procedure volume decline. Slide 14 covers neurovascular. This area continued its rapid growth trajectory, surging 42.9% year-over-year. Embolic coils expanded by 42.5%, led by our new peripheral vascular embolization model and the continued success of our pre-procedural simulation initiatives. Aspiration catheters recorded a 29.6% jump, overcoming reimbursement price cuts through stronger customer engagement and market share gains amid intensifying competition. Stent retrievers doubled compared to last year, tracking right in line with our plan. From Q3 onward, we will shift our commercial focus from deepening penetration in existing accounts to opening new hospital accounts. Moving to slide 15 for gastrointestinal, sales expanded significantly, jumping 41.6%. The primary growth engine was our biliary tube stents, which surged by 76.7%. In addition to steady adoption of our new model across newly targeted facilities, we captured temporary demand tailwinds resulting from competitor supply shortages. Endoscopic Guidewires and GI stents also posted steady growth across the board. Please turn to slide 17. From here, I'll provide an update on our global expansion initiatives. This slide illustrates our overall global roadmap. In phase one, running through fiscal 2028 under our medium-term plan, we are expanding sales of proprietary products through local Distributors, primarily across the Middle East and Asia, leveraging our Japanese approvals. For fiscal 2028, our target is an overseas sales ratio of 5%, or about 2 to 3 billion yen in revenue. Concurrently, we are optimising our domestic products to meet global standards. In phase two, over the medium to long term, we aim to secure regulatory approvals and enter the massive US and European markets. Longer term, Our vision is to elevate our international sales ratio to 30%, generating tens of billions of yen in overseas revenue, and establish ourselves as a true global medtech company. Slide 18 highlights our recent progress. As shown, we are advancing phase one expansion in the Middle East and Asia simultaneously with our groundwork for phase two entry into the US and Europe. In the Middle Eastern Asia, we have actively pursued local regulatory clearances with country coverage expansion as our primary KPI. As a result, our distributor agreements reached 25 countries as of late September. We also established a representative office in Bangkok this past May, strengthening on the ground distributor support and market intelligence. Going forward, we will pivot from adding countries to deepening local penetration and driving market share. At the same time, for the U.S. market, while adapting our proprietary portfolio to overseas regulatory standards, we established our wholly-owned subsidiary, JLL Med USA, in California this August, followed by the acquisition of CrossVascular in October. Looking ahead, we will focus on building our U.S. operating infrastructure and steadily broadening our commercial product line-up. Please turn to slide 19 for details on the acquisition of CrossVascular. Through our U.S. subsidiary, we fully acquired CrossVascular, a medical device company with an FDA-cleared RF transceptal system for a total transaction value of approximately 974 million yen, including an earn-out of up to 4 million U.S. dollars. Using CrossVascular's transseptal platform as our initial spearhead, we will kick off our full-fledged entry into the United States, the world's largest medical device market. Slide 20 outlines the strong growth potential of the US EP market. Driven by volume factors such as an aging population, the expansion of ambulatory surgical centers or ASCs, and procedural efficiency gains facilitated by PFA, the number of U.S. atrial fibrillation procedures is projected to grow from 365,000 cases in 2024 to 1.43 million cases by 2034. That is a 15% CAGR, reaching seven to eight times the size of Japan. On top of this, unit price dynamics will serve as a powerful catalyst, supported by the rising penetration of premium devices like PFA catheters, steerable sheaths, and transceptal wires. Consequently, the total USEP market is projected to expand from $6 billion in 2024 to $25 billion by 2034, also at a 15% CAGR. Within this space, we have identified diagnostic catheters and accessories The accessories segment in particular is expected to grow at a rapid 20% CAGR, bringing our combined target market to $11.5 billion by 2034, over 10 times the size of Japan. Furthermore, hospital prices in the US are substantially higher than in Japan. We see this as an exceptionally compelling growth opportunity that aligns perfectly with our proprietary catheter technologies Please turn to slide 21 for our operational road map in the United States. We aim to capture this massive market by establishing a focused portfolio centred on AF accessories and diagnostic catheters. First, during the start-up phase running through roughly 2028, we will focus on establishing our local commercial infrastructure, deepening engagement with key opinion leaders And initiating sales of our transeptal system at select medical centres. At this stage, we target proprietary sales of approximately 500 million yen. Next, in the line-up expansion phase, we will systematically expand our proprietary product offering by adding steerable sheaths and broadening our line-up of standard EP diagnostic catheters. Diagnostic catheters represent a domain where our core technologies shine, and we intend to roll out a comprehensive lineup of catheter variations. Finally, in the scale-up phase, around 2032, we will launch our flagship intracardiac defibrillation catheters and expand distribution nationwide across U.S. healthcare institutions. This concludes our presentation for the first half of FY 2027. Thank you very much for your time today.