Linical Co.,Ltd. Q4 FY2025 earnings call

Company Overview & Mission

• Linical spun out of Astellas Pharma in 2005 after a merger, focused on providing CRO services for new drug development, with a mission to deliver high-quality professional services and pursue value for patients, healthcare providers, shareholders, and employees.
• The company has pursued global growth via M&A, with acquisitions in South Korea, Europe, and the U.S., and recently established a new subsidiary in Australia, which has already secured one project and multiple inbound inquiries from Japanese pharmaceutical clients.

Operational Highlights

• Linical won the "Best Global CRO 2024" award from U.S. industry publication Global Health&Pharma's Global Excellence Awards, marking the second consecutive year it has received this recognition, reflecting strong global industry standing.
• Goodwill-related acquisition debt for the European acquisition was fully repaid in November 2024; remaining acquisition debt for the U.S. acquisition will be fully repaid in approximately 2.5 years.
• A new data management and statistical analysis center was established in South Korea to eliminate time zone differences for APAC clients, and order intake for this service from Japan, Taiwan, and China is already growing strongly.
• Linical has built existing operations in approximately 20 countries across North America, Europe, Asia, and Australia, and already has multiple inbound inquiries from Japanese companies looking to enter the Chinese market, with several contracts already in progress.

Strategic Priorities

• Target to expand global headcount from the current 669 (down from 850 pre-COVID due to hiring freezes) to over 1,500 total: 500 in Japan (hosting global headquarters functions), 400 in Europe, 400 in Asia, and 400 in the U.S. This scale is projected to deliver annual revenue of 25 billion to 30 billion yen.
• An additional M&A transaction in the U.S. is required to reach the 400-headcount target in the critical large U.S. market; management plans to execute this M&A while maintaining profitability to avoid recurring past losses.
• Long-term target to expand operations to approximately 60 countries to enable year-round patient recruitment for seasonal indications (e.g., influenza) by leveraging Northern and Southern Hemisphere seasons, and to access high-population growth markets in Southeast Asia and Indonesia that are ideal for clinical trial execution.
• Differentiation strategy: Compete with large global CROs via faster communication, more flexible client responsiveness, and granular, customized client service.
• Digital and AI strategy: Invest in AI capabilities via partner networks (Linical does not need to own an independent AI platform) to keep up with industry demand for more efficient clinical trials, and also supports decentralized clinical trial (DCT) initiatives.
• Capital allocation policy: Prioritize retaining internal capital to fund growth (especially M&A) while maintaining stable dividends, with a planned 16 yen per share dividend for FY2026 March.

By product segment: Linical operates three core product/ service segments: (1) Drug Discovery Support: no separate absolute revenue or contribution percentage is provided in the transcript; this segment supports early-stage development from preclinical through to IND-enabling activities, including consulting, strategy development, and out-licensing support. (2) CRO (Clinical Trial Services): no separate absolute revenue or contribution percentage provided; this segment executes all phases of clinical trials for biopharmaceutical clients globally. (3) Post-Approval Drug Development (Ikuyaku): no separate absolute revenue or contribution percentage provided; this segment supports post-approval studies including safety monitoring and studies to accelerate peak sales timing for newly approved drugs. By geographic segment (the primary breakdown provided): Total consolidated revenue for FY2025 March was 10.4 billion yen, a 15.2% decrease year-over-year. Overseas revenue accounts for 67% of total consolidated revenue, with 55% of total employees based overseas. Geographic performance breakdown: 1) United States: Post-M&A growth continues, strong performance, and is Linical's largest current growth driver; 2) Europe: Significant year-over-year revenue decline, with an operating deficit, though the deficit has shrunk from prior periods; 3) Japan: Sharp revenue decline driven by the cancellation of 3 large client projects, with ongoing market headwinds from drug lag/drug loss; 4) South Korea: Performance negatively impacted by medical sector strikes; 5) Taiwan and China: Revenue declined, with recovery expected in coming periods.

• Management expects a return to revenue growth and net profitability for FY2026 March, driven by recovery in European and Japanese operations.
• Consolidated revenue guidance for FY2026 March is 11.2 billion yen, an increase from FY2025's 10.4 billion yen, but still below the company's all-time high of approximately 12.5 billion yen; management expects returning to pre-COVID peak revenue will take an additional 2 to 3 years.
• Total current order backlog is approximately 11.5 billion yen, which includes several tens of billions of yen in un-signed pending contracts; closing these pending contracts will drive sharp revenue growth once finalized.
• Management expects a full operating profit breakeven or return to operating profit in Europe for FY2026 March.
• A large Phase 3 global CNS clinical trial is expected to start in the U.S. in FY2026 March, which management views as a major potential catalyst for U.S. growth.
• Key performance metrics have declined over the past two years, but management expects a gradual recovery starting in FY2026, with a strong rebound by FY2027 or FY2028.

• Japan continues to face structural market headwinds from drug lag and drug loss, suppressing domestic clinical trial demand.
• Ongoing negative macro impacts: The Russian invasion of Ukraine continues to pressure European market activity, though recovery is starting as peace talks become more prominent.
• U.S. market faces near-term uncertainty from the U.S. presidential administration's stated policy of drug price cuts, healthcare cost control, and regulatory agency shrinkage.
• South Korean operations were negatively impacted by ongoing medical sector strikes in FY2025.
• Large client projects can be suddenly canceled due to lack of drug efficacy or client internal strategic changes, which has caused significant negative revenue and profit impacts in recent periods.
• Cross-border communication and coordination challenges exist across the company's 20+ global subsidiaries, requiring active investment in leadership development and internal communication to resolve.

Q: How does the current geopolitical and policy environment affect overall CRO market growth prospects for Linical? / A: Management notes that while the U.S. administration's drug pricing policies create some short-term uncertainty, the long-term CRO market growth driver of increasing biopharmaceutical R&D investment, especially in advanced antibody modalities, remains intact. If the war in Ukraine concludes, European market activity is expected to rebound quickly, which will drive a strong recovery in Linical's European revenue and profitability. The growing pipeline of advanced next-generation antibody drugs will create increasing demand for specialized CRO services that Linical is positioned to capture.

Q: What is the impact of past large project cancellations on Linical's workforce, and does the company face excess labor capacity? / A: After past large project cancellations, Linical proactively implemented a hiring freeze to adjust workforce size, reducing total headcount by nearly 200 from pre-COVID levels. This proactive adjustment means the company does not currently have meaningful excess labor capacity. As new projects come online and growth resumes, management plans to scale hiring gradually to match growing demand, avoiding the capacity imbalances that occurred after past cancellations.

Q: How has the difficulty of conducting clinical trials for next-generation antibody drugs changed, and what is Linical's track record in this space? / A: Next-generation antibodies (bispecific, trispecific, blood-brain barrier penetrating, and AI-designed) have more complex development pathways than first-generation single-target antibodies, increasing clinical trial complexity and specialized expertise requirements. Linical has already invested in building capabilities to support all generations of antibody drug development, from first-generation through the newest 4th-generation AI-designed and triple-specific modalities. The company's recognized expertise in this growing segment has helped it win new global projects from U.S. and European biotech clients, positioning it to capture ongoing growth in this high-demand area.

Q: What strategy is Linical pursuing to build greater market presence as a global CRO? / A: Linical's core strategy is to position as a strong, agile alternative to large, bloated global CROs rather than aiming to become the largest CRO by headcount or revenue. The company prioritizes bringing large global clinical trial projects originating in the U.S. and Europe to include sites in Japan and other APAC markets, leveraging its regional footprint to win cross-border projects. Management continues to differentiate via faster, more responsive client communication compared to larger competitors, and targets specialized expertise in high-growth areas like advanced antibody development to build market share.