Eiken Chemical : Bridge Report for the Fiscal Year Ended March 31, 2023

Company Information

Stock Information

* Share price is as of the end of May 24. All figures are from the FY March 2023 financial settlement report.

Business Performance Trends

* Unit: Million-yen, Yen. The definition for net income means net income attributable to owners of parent.

This Bridge Report presents EIKEN CHEMICAL's earnings results for the fiscal year March 2023 etc.

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Table of Contents

Key Points

1. Company Overview
2. Fiscal Year Ended March 2023 Earnings Results
3. Fiscal Year Ending March 2024 Earnings Estimates
4. Progress of "EIKEN ROAD MAP 2030"
5. Interview with President Notomi
6. Conclusions

Key Points

• In the fiscal year (FY) 2023, sales increased 0.6% year on year to 43.2 billion yen. Although sales of reagents for genetic testing for COVID-19 using the LAMP method decreased due to a sharp decline in the number of newly infected patients with COVID-19 in the fourth quarter, sales of reagents for urinalysis and immunoserological tests grew slightly from the previous year, due to the resumption of various medical checkups and testing programs and continued recovery in the number of outpatients. Operating income declined 11.1% year on year to 7.4 billion yen. Gross profit declined 0.3% year on year due to higher costs for raw materials and resources, while SG&Aexpenses, including R&D expenses, increased 7.1% year on year. Both sales and profit were largely in line with forecasts.
• The company is forecasting lower sales and profit for FY 2024. Net sales are expected to decrease 2.9% year on year to 42 billion yen, and operating income is projected to decline 27.9% to 5.3 billion yen. COVID-19-related sales and patent income are projected to decline, while overseas sales are expected to increase by double digits. The company expects sales of reagents for fecal occult blood tests to recover, as well as sales of urinalysis reagents to Sysmex Corporation to remain strong. Gross profit margin is forecast to decline due to a change in the product mix. The company is expecting increased investment for growth and higher costs due to higher prices of resources. Based on its basic policy of paying stable and consistent dividends, the company plans to pay a dividend of 51.00 yen/share, like in the previous year. Payout ratio is expected to be 44.4%.
• Significant progress has been made on sustainability. In January 2023, the company was selected for the first time as a constituent of the FTSE Blossom Japan Sector Relative Index, a leading index for ESG investing. The FTSE Blossom Japan Sector Relative Index, which was created by the global index provider FTSE Russell, reflects the relative performance of Japanese companies that excel in environmental, social and governance (ESG) performance in their respective sectors. The index is also used as a passive ESG management index for Japan's Government Pension Investment Fund (GPIF), the world's largest pension fund. In addition to this, the company has expressed its support for the TCFD and disclosed more information on climate change, and adopted "Tochigi- Furusato Electric Power Supply Service," a renewable energy source derived from hydroelectric power generation, at its Nogi and Nasu Offices to become carbon neutral. This has made it possible to reduce CO2 emissions from electricity used at both facilities to zero.
• In addition to a decline in COVID-19-related sales, the company expects a decline in sales and profit in FY 2024 due to increased investment in growth and higher costs due to higher prices of resources. However, the company has completed inventory adjustments for fecal occult blood test reagents overseas and is expecting double-digit revenue growth for the current fiscal year. The companion diagnostic system is well on its way to being released in the market, and sample stabilization reagents have already been developed, indicating that the company is building a foundation for solid growth except for COVID-19-related areas.
• The new entrusted testing business that will be started with the companion diagnostic system will lead to the

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promotion of proprietary cancer gene tests and speed up the development of new products. We would like to pay attention to the progress and results of this business.

1. Company Overview

EIKEN CHEMICAL is a general manufacturer of clinical diagnostics, including immunological and serological, microbiological, clinical chemistry, urine analysis and genetic screening test. It also develops and sells medical devices.

It offers many products that occupy high market share including fecal immunochemical test that occupy about 60% of the domestic share, Urinalysis test, Microbiological test and so on. Its unique gene amplification technology, "LAMP", is recognized in the world. With the fecal immunochemical test reagents, urinalysis test strips and LAMP, EIKEN is aiming to become a global corporation.

1-1 History

Founded as Koa Kagakukogyo Co., Ltd. in 1939, the company started manufacturing and selling nutritional foods and pharmaceuticals made from livestock organs. In 1949, it was the first company in Japan to successfully commercialize a powdered agar for the detection of bacteria (Salmonella-Shigella [SS] agar). In 1961, it established the Clinical Diagnostics Division and began R&D on in-vitro diagnostics.

In 1989, the company launched "OC-sensor," the world's first fully automated fecal occult blood analyzer. This led to the establishment of its current overwhelming lead in this field.

After that, while expanding its business domains such as reagents for urinalysis testing and microbiological testing, in 1998, the company developed the LAMP method, a new gene amplification technology. It has launched various products using the LAMP method that are simpler, faster, and more accurate than conventional testing methods.

In 2005, the company concluded a joint development contract with FIND (Foundation for Innovative New Diagnostics) for a rapid genetic tuberculosis detection method, based on the LAMP method. It then proceeded with joint development related to testing for malaria, HIV, etc.

In March 2020, the company released COVID-19 detection reagent utilizing the LAMP method to be used against COVID-19, which has been spreading worldwide.

*For further information about the LAMP method and FIND, please refer to "1-6 Characteristics and Strengths (4) Competitive Advantages of the LAMP Method."

1-2 Management Philosophy

"Management Philosophy": Protect the health of the public through health care services.

"Management Vision": EIKEN group is dedicated to leveraging expertise as a medical testing pioneer to increase corporate value by protecting the health of the public with products and services that customers can trust.

"Motto": We EIKEN provide trustworthy quality and develop with technology.

EIKEN group formulates "EIKEN WAY" as its attitude toward each stakeholder, centering these philosophy vision, and motto.

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(Source: EIKEN CHEMICAL)

1-3 Market Environment

Domestic Market

The market scale of clinical reagents is about 490.2 billion yen and 792.3billion yen (including research reagents and diagnostic devices) as of 2021 (survey by the Japan Association of Clinical Reagents Industries, or JACRI. Eiken Chemical Data.).

To control rising medical costs, the Japanese government is focusing on preventive medicine such as special health check-ups (metabolic check-ups) and cancer screenings. It is expected that this, along with the aging population, will lead to an increase in the number of samples (number of specimens).

Some negative factors include the impact of population decline because of decreasing birth rates and revision of medical treatment fees (reduction). However, the trends of laboratory test fees which had been subject to revision of insurance (medical laboratory test fees) show that, even though they were cut by some 40% from 1997 to 2006, the fees have been stable or only slightly reduced after 2007. (Laboratory test fee in fiscal 2022: -1.14%)This is the result of industry-wide efforts to emphasize the importance of prevention and testing, and the domestic market is expected to continue to grow modestly by about 2% per year over the medium term, if the impact of COVID-19 is not taken into account.

Out of 140 member companies (as of April 2022) of JACRI mentioned above, about 80 are manufacturers, and there are about 15 companies with over 10 billion yen in sales. Most of them are small to medium sized companies. Because the test items of diagnostic tests range widely, each company has its own field of strength, and business segregation is already established in the industry. As a result, collaboration, such as supplying raw materials and products from other companies and manufacturing and selling them, is often observed. Against such a backdrop, the market is modestly growing. Therefore, there is currently no apparent trend of weeding out uncompetitive corporations.

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Overseas Market

The global clinical laboratory test reagent/device market is estimated to be US$ 98.2 billion and, by region, the market is occupied by the USA at 39.8%, followed by Europe at 28.0% and Asia at 22.9% (As of 2021) (Markets and Markets "In Vitro Diagnostics Market" Eiken Chemical Co., Ltd.).

The overseas market is over ten times larger than the domestic market. In developed countries, the number of tests is increasing as aging of population progresses. Furthermore, in emerging countries, the needs for medical services are expanding because of economic and income growth. As a result, the annual growth rate of overseas market is expected to be over 3%, which is much higher than that of the domestic market. Therefore, the Japanese companies in the industry are vigorously undertaking globalization of their businesses.

In the global market, however, Roche being the most dominant with the sales of $61.4 billion in 2019, large global companies such as Roche, Abbott, SIEMENS, and Danaher are the main players, and in order to survive the competition, Japanese companies must strengthen their competitiveness by, for example, developing unique products or systems.

1-4 Business Description

1. What are Clinical Tests?

One type of clinical tests is the "Biological test" that directly examines the body using medical equipment such as X-ray, CT, MRI, electrocardiogram, and ultrasound. Another type of clinical tests is the "Laboratory test" that examines biological samples (specimens) obtained from people such as blood, urine/feces, and cells.

The clinical test reagents made by EIKEN CHEMICAL are the ones used for medical laboratory tests. For example, they are used to test infectious diseases or to measure small amounts of blood contained in stool. They are made to support diagnosis. Most of these reagents are called in vitro diagnostics (IVD) and are regulated by the Pharmaceutical and Medical Device Act so reagent manufacturers file applications with PMDA (Pharmaceuticals and Medical Devices Agency) and obtain its approval. Users include hospitals, clinics, medical offices, medical test centers that carry out tests commissioned by medical institutions, health screening centers, public health centers, and institutions for health research, and others.

2. Major Products

EIKEN CHEMICAL mainly manufactures and sells the following types of reagents and medical devices.

As they deal with a wide range of reagents, they not only sell their in-house products but also purchase and sell products from other companies.

Major in-house products include fecal immunochemical test reagents, microbiological reagents, immunological and serological reagents, urinalysis test strips, genetic testing reagents, etc. The sales ratio of in-house products to other companies' products is approximately 60:40. The gross profit margin is approximately 55% for in-house products and approximately 35% for other companies' products.

*Results for the fiscal year ended March 2023.Unit: Million Yen

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