TERUMO CORPORATION Q2 FY2027 earnings call

• Strategic Acquisition: Completed the acquisition of Arsenal Medical for approximately $250 million plus contingent consideration. This adds NeoCast, a liquid embolic agent for chronic subdural hematoma, expanding Terumo Neuro’s portfolio beyond cerebral aneurysms and acute ischemic stroke.
• Blood and Cell Technologies (TBCT) Foundation: TBCT has achieved a 14% CAGR in revenue from FY2021-FY2025 (excluding plasma innovations). Key growth platforms include Reveos (automated whole blood processing) and Spectra Optia (stem cell collection/apheresis). Management targets 5%+ revenue growth and a JPY 5 billion+ increase in adjusted operating profit for FY2027.
• Terumo Aortic Recall: Voluntary recall initiated for RelayPlus, RelayPro, and TREO stent grafts after endotoxin levels exceeded specifications during pre-shipment testing in September. The issue is isolated to the Bolton Medical plant in Florida. Root cause is under investigation, including supplier review. Shipments are suspended.
• Terumo Neuro Supply Constraints: Temporary supply constraints affecting Neuro business due to workforce limitations at the Costa Rica manufacturing site. Competitors have recruited staff locally, causing turnover issues. Management expects resolution within 3-4 months as training progresses.
• CSL Plasma Termination Impact: Prior impairment losses of JPY 97.5 billion were recorded in October related to the termination of the CSL Plasma supply agreement. This business is excluded from core TBCT growth metrics going forward.
• GS31 Strategy: Management plans to announce its next 5-year growth strategy (GS31) on December 15, focusing on portfolio transformation, capital efficiency, and sustainable growth.

The following financial performance data is derived from the first half of the fiscal year ending March 2027, as detailed in the CFO's presentation. Note that specific revenue contribution percentages for individual segments are not explicitly stated in the transcript; however, relative growth and margin trends are provided.

• Cardiac & Vascular (C&V): Revenue grew 6% on a local currency basis. TIS led growth due to strong demand in the Americas and Asia. Neuro remained soft due to supply constraints, while Aortic declined due to the voluntary recall. Profit margins reached 30%, supported by pricing initiatives and tariff refunds.
• Medical Care Solutions (TMCS): Revenue growth was driven by Hospital Care Solutions (supported by Japan drug price revisions) and Pharmaceutical Solutions (PLAJEX and kitting products). Reported profit margin was 11% (excluding Leverkusen plant impact, it would have been 14%). The Leverkusen plant incurred upfront investment costs.
• Blood and Cell Technologies (TBCT): Global Blood Solutions performed well, particularly blood collection products like Trima and Reveos. Global Therapy Innovations maintained strong growth. Plasma innovation is included through Q2 but expected to scale down. Profit margin was 17%.
• Organ Technologies (OT): Revenue increased 36% year-on-year to JPY 11.6 billion, driven by the expanding liver transplant market and NMP technology. Profit margin was 14% for the first half, impacted by one-time optimization costs in Q1 and seasonal factors in Q2. Full-year target remains at 20% margin.

• FY2027 Revenue Forecast: Revised downward to JPY 219.5 billion (a reduction of JPY 10 billion from the October guidance), reflecting the impact of the Terumo Aortic voluntary recall and temporary Neuro supply constraints.
• FY2027 Operating Profit Forecast: Revised downward to JPY 119 billion (a reduction of JPY 41 billion from the October guidance). This includes the direct business impact of the Aortic recall and conservative asset valuation risks.
• FY2027 Adjusted Operating Profit: Revised downward to JPY 271.5 billion (a reduction of JPY 3 billion from August guidance). This excludes one-time items and reflects underlying strength in core businesses.
• FY2027 Profit Forecast: Expected to be JPY 87.5 billion.
• TBCT Specific Guidance: Management targets revenue growth of 5% or more and an adjusted operating profit increase of JPY 5 billion or more compared to FY2026 guidance.
• Organ Technologies: Maintains full-year profit margin target of 20% despite Q2 seasonal slowdown.

• Terumo Aortic Operational Failure: Endotoxin contamination found in stent grafts manufactured at the Bolton Medical facility. Scope of impact is uncertain, and root cause is unidentified. Potential for FDA warning letters or further regulatory scrutiny exists.
• Asset Impairment Risk: Management has conservatively factored in JPY 38 billion of risk related to asset valuations (fixed assets, intangibles, and R&D assets) associated with the Aortic business. No final decision on write-offs has been made.
• Supply Chain Disruption: Prolonged suspension of Aortic shipments could lead to significant loss of market share and revenue recovery difficulties. Neuro supply is temporarily constrained due to labor shortages in Costa Rica.
• Regulatory Uncertainty: Future actions by the FDA regarding the Aortic recall are unknown. Reapplication for PMA approval is not currently required, but this may change.
• Labor Market Competition: Intense competition for skilled labor in Costa Rica poses a recurring risk to Neuro manufacturing stability.

Q: Analyst asked about the scope of the Aortic recall, whether it is limited to the Bolton plant, and potential FDA implications. / A: Management confirmed the endotoxin issue is isolated to the Bolton Medical plant in Florida and did not occur at other Terumo sites. The root cause is still under investigation, covering both internal processes and suppliers. Regarding the FDA, management stated they do not know what action will be taken yet, though no PMA reapplication is currently understood to be necessary.

Q: Analyst questioned the composition of the JPY 41 billion operating profit reduction, specifically asking if it primarily consists of asset impairments and if it implies the Aortic business might cease operations. / A: CFO explained that the JPY 41 billion includes the near-total loss of second-half revenue, recall-related valuation reductions, and significant risks associated with fixed assets and intangible/R&D assets acquired via Bolton Medical. He clarified that while impairment is likely, no final decision has been made, and the number represents a conservative inclusion of these risks rather than a confirmed write-off.

Q: Analyst asked if production could be relocated from Bolton to the Glasgow site to mitigate the shortage and how long recovery would take. / A: Management stated that transferring production from Bolton to Glasgow involves a long lead time and is not assumed for the short term. For the next fiscal year, resuming shipments is difficult, and the timeline for identifying the root cause and implementing corrective actions is uncertain. They emphasized that recovery depends on resolving the manufacturing defect and regulatory inspections.

Q: Analyst inquired about the Terumo Neuro supply constraints in Costa Rica, asking if automation can solve the labor shortage and how long training takes. / A: Management explained that the issue stems from competitors opening large plants nearby and recruiting workers. Short-term solutions involve pay parity and culture retention, not automation, which has historically faced challenges for Neuro products. Training for new hires takes 3-4 months. Automation is not a viable short-term fix but may be considered in the medium-to-long term.

Q: Analyst asked about the Arsenal Medical acquisition milestones and the status of the CSL Plasma termination and Leverkusen plant. / A: Management noted that milestone payments are standard and tied to R&D progress, with annual R&D expenditure estimated around JPY 4 billion. Regarding CSL, the transition is on track. The Leverkusen plant is ramping up production facilities, and negotiations with pharmaceutical companies for CDMO services are ongoing, though no contracts are finalized yet.