Outline of New Medium-term Plan, "H.U. 2025—Hiyaku & United"

In September 2020, the H.U. Group formulated the new medium-term plan, "H.U. 2025—Hiyaku (significant growth) & United," covering the period up to fiscal 2024, ending March 31, 2025, which aims to realize significant and sustainable future growth.

Below please find the presentation material of the Medium-term Plan.

▶　Medium-term Plan, H.U. 2025 ~Hiyaku & United~

* The presentation material is partially updated according to the press release “Notice of Change of Segment” released on July 16, 2021

1) Review of Previous Medium-term Plan, "Transform! 2020"

Our previous medium-term plan, "Transform! 2020," which concluded at the end of fiscal 2019, fell considerably short of its numerical targets due to several factors. Among these were the failure to reach the customer acquisition targets set for the Clinical Laboratory Testing (CLT) and In Vitro Diagnostic (IVD) businesses, and other factors affecting the CLT business, including a delay in achieving fixed-cost reduction, a change in the sales mix, and the unexpectedly large impact of price falls.

On the other hand, we made steady progress with laying the foundations for significant and sustainable growth starting from fiscal 2020. This progress was seen, for instance, in the integration of personnel systems and IT functions as part of our Group integration policy, the expansion of market share in the CLT business, and investments for future growth, notably R&D enhancement and the construction of the New Central Lab. We now see it as an ongoing task to build profitability on this foundation.

2) The H.U. Group’s Business Environment and Key Themes of the New Medium-term Plan

In the business environment where the H.U. Group operates, demographic aging and the introduction of advanced medical treatments are among the factors driving a projected increase in medical care costs. On the other hand, the worsening financial position of medical institutions and declining specimen testing fees together with pressure to limit medical care costs, are expected to lead to continued difficult conditions for the Japanese CLT market. Nevertheless, new opportunities for growth have also arisen despite the policy of restricting medical costs. Reorganization resulting in a reduction in the number of hospitals and hospital beds has led to growing demand for in-home healthcare services and preventive medicine, while medical and IT technologies continue to advance.

Given these trends, the business environment is in a state of constant evolution. We are also faced with fast-developing short-term changes—including the altered patterns of consumer behavior and the reduction in outpatient consultations due to the COVID-19 pandemic—to which we need to find an appropriate response. The overseas CLT market is experiencing growth, mainly in emerging countries, but in developed countries the effort to limit social security costs continues to result in stagnant growth. Moreover, regulatory changes in individual countries have led to increased registration costs, contributing to a continuing challenging environment for business.

In response to these conditions, we will consolidate the growth foundations we laid under the previous medium-term plan and the associated organizational and operational reforms, thereby proceeding with concerted Group initiatives to promote the following three key themes set in the new medium-term plan:

• Opening of the New Central Lab
• Enhancement of the OEM business
• Healthcare × ICT

3) Strategy to Increase Corporate Value

With its LTS and IVD business operations, the H.U. Group is a unique enterprise even in world terms. In addition to the two business, consisting of these two plus the sterilization related business, we are working to develop across a broad front by expanding and strengthening the home-visiting, welfare business in healthcare related business domain. We believe that continuously generating high added value and new value through these business activities will increase the corporate value of the H.U. Group.

• Value Creation Story of Our Business

  Building on the foundation of the intangible assets held by our business, we will work to maximize value provided to the customer by exploiting Group synergies to the full.

  In the LTS and IVD businesses, we will launch new clinical tests with short lead times by coordinating activities across the Group, including its R&D functions, to swiftly develop, evaluate and gain regulatory approval for such tests. We believe that the effectiveness of our value creation model in the LTS and IVD businesses has been demonstrated once again by our recent rapid launch of the novel coronavirus (SARS-CoV-2) antigen test and the resulting contribution to profit. We are also confident that the spread of COVID-19 infection has led to widespread public appreciation of the importance of testing and wide recognition of our LTS business as part of the social infrastructure that supports medical care.

  Going forward, we will coordinate with the sterilization related business, which provides sterilization services to central supply rooms and operating rooms, to offer total solutions as a Group, thereby maximizing value provided to the customer and increasing the Group’s corporate value.

  

• Business Expansion as a Group

  We are achieving steady growth, notably by offering total solutions as a Group to hospitals and other medical institutions. Among measures to target further growth, we will work to expand advanced tests and develop next-generation platforms.

  Meanwhile, in addition to progressing with the digitalization of test results, we will introduce and deploy ICT-based service tools, including personal health records (PHRs), which will enable us to utilize the wide range of data obtained through business activities and build a medical/health information platform to support business expansion into the Healthcare × ICT field.

  

• Development of Healthcare × ICT Services

  In response to the demand for further enhancement of community-based medical care and preventive medicine, the H.U. Group is reinforcing its home-visit nursing and long-term care business and self-medication and services through corporate health insurance associations, and will develop new services by integrating these services with ICT.

  Additionally, we will promote packages offering operating support for clinics through software as a service (SaaS) combined with PHRs for consumers. In this way, the H.U. Group will support enhanced utilization of test results in the clinical setting and provide increased added value in LTS business services to general practitioners.

  

4) Key Initiatives under the New Medium-term Plan

The new medium-term plan divides into two phases: the first to respond to COVID-19 and carry out structural reform ahead of the opening of the New Central Lab; and the second to recover investment following the laboratory’s operational start and to expand profits.

Within these frameworks, the medium-term plan identifies the following key initiatives for concerted Group action:

1. Cost-of-sales reduction through stable operations and automation at the New Central Lab
2. Fixed-cost reduction and enhanced profitability in the LTS business
3. Progress with the Group integration strategy
4. Expansion of the OEM business within the IVD business

1. Cost-of-Sales Reduction through Stable Operations and Automation at the New Central Lab

For the H.U. Group, the most important of the key initiatives in the medium-term plan is cost-of-sales reduction through stable operations and automation at the New Central Lab, due to start operation in January 2022.

The construction of the New Central Lab is designed to ensure the continued delivery of high-quality testing services even in the changed business environment of the future. In general testing, it will boost operational efficiency through full automation and maximize processing capacity through 24-hour operation, while in esoteric testing it will be equipped to handle the most advanced test items. By deploying AI, robotics and related technologies, the new facility will promote drastic improvement in operational efficiency and quality.

Through test automation and other improvements, we envisage cost-of-sales reductions of 15% in general testing and 7% in esoteric testing in fiscal 2024, compared to fiscal 2019 (figures for the New Central Lab only).

2. Fixed-Cost Reduction and Enhanced Profitability in the LTS Business

While preparing for the opening of the New Central Lab, we are undertaking a nationwide reorganization of our laboratories. Specifically, to join the New Central Lab, we will open our New Fukuoka Lab in fiscal 2020 and the New Kansai Lab in fiscal 2023, thus establishing a tri-axis lab network to consolidate test operations. In parallel, to put in place a lab system that meets customer needs by reflecting regional medical demand, we will set up a short turn-around time (STAT) laboratory in each region, thus steadily responding to emergency testing needs.

Meanwhile, we will optimize logistics costs by establishing joint logistics operations in alliance with external operators, consolidating internal Group collection operations and amalgamating facilities.

These measures will help us to provide not only high-quality testing but also improved cost-competitiveness and faster reporting of test results, enhancing our customer appeal as a testing company and further boosting our market share.

3. Progress with the Group Integration Strategy

3-1 Integration of sales forces

In September 2020, H.U. Frontier, Inc. was established through the integration of the domestic sales departments and marketing departments of SRL, Inc., Fujirebio, Inc., and NIHON STERY Co., Ltd., and began operation on October 1, 2020.

The establishment of the company was aimed at further accelerating the intensification of Group synergies that the H.U. Group had already been promoting. Against the background of rapid changes in the medical environment, H.U. Frontier will provide a wide range of services and total solutions in response to customer needs across the full range of the Group’s operations: from lab testing and its related services to manufacture and sale of IVD reagent products, and sterilization related services for medical devices and equipment.

Moreover, through integrated access to the customer base of each company, H.U. Frontier will achieve expanded cross-selling among different segments and enhanced sales to existing customers, while leveraging the technological strength of each company to develop optimal new services and products. In this way, we will seek to maximize the value provided to the customer by the Group as a whole.

3-2 Expansion of inter-segment sales

We will continue to promote the expansion of inter-segment sales of LUMIPULSE products to our test laboratories and FMS/Branch customers We will also work to develop test reagents with a high cost of sales ratio or high volume of use, and strive to shift to in-house manufacturing. In this way, we will reduce costs in the LTS business and improve overall Group cash flow.

3-3 Enhancement of R&D

As well as integrating R&D functions within the Group to promote sharing of knowledge resources, we will implement an optimal Group-wide R&D strategy, thus promoting flexible introduction of technology and accelerating development.

4. Expansion of the OEM business within the IVD business

The overseas strategy of the IVD business has hitherto been focused on expanding sales of LUMIPULSE products, but it has proven extremely difficult as a late market entrant to expand profit in the face of competition from major global enterprises. Moreover, registration costs are rising mainly due to regulatory changes in individual countries. We will respond to these conditions with a policy of selection and concentration regarding the product items and regions targeted in our overseas LUMIPULSE strategy. Meanwhile, we will work to enhance and expand the OEM business by leveraging the reliability and reputational advantage based on our successful track record for LUMIPULSE products in the Japanese LTS sector, and by utilizing our high-quality material and reagent development abilities in the immunoassay field, which is a strength of the IVD business.

The OEM business will be driven by the tripolar system of Fujirebio Diagnostics, Inc. (FDI) in the United States, Fujirebio Europe N.V. (FRE), and Fujirebio Diagnostics Japan, Inc. (FDJ).

5) Numerical Targets for Fiscal 2024 (Consolidated)

The new medium-term plan, which emphasizes not only steady net sales growth and profit margin but also the need to improve capital efficiency and generate stable cash flow, sets the following numerical targets:

Numerical targets for FY2024

* Five-year CAGR during FY2019–FY2024

Cumulative numerical targets of medium-term plan

6) Plan Details by Segment

1. LTS Business

In the LTS business, we recognize enhancement of profitability as the top priority. As stated in Item 4) above (key initiatives under the new medium-term plan), we will radically improve profit structure through measures, including cost-of-sales reduction through stable operations and automation at the New Central Lab; nationwide reorganization of laboratories; rationalization of logistics functions; and provision of Group-wide total solutions through integration of sales forces.

The LTS business environment is constantly evolving in response to a range of influences, from advances in medical technologies to the rollout of community-based integrated care systems and the increasing importance of ICT tools in medical treatment. To enable the business to achieve significant growth by adapting to its changing environment, we have also identified the following key measures: product enhancement and introduction of ICT tools for medical institutions and consumers.

Product enhancement
As a clinical laboratory testing company with strength in esoteric testing, we will continue with the introduction of new test items in cutting-edge fields with high medical treatment demand, such as cancer genomics, blood diseases, infectious diseases and rare diseases. We will also work to enter the fields of regenerative medicine and cell-based therapies, where expansion of demand is expected in the future.

To improve profitability, we will seek to enhance cost-competitiveness by expanding the use of LUMIPULSE and the range of test items it can be used for, switching to in-house operation of currently outsourced test items, and finding alternatives for unprofitable product items.

Introduction of ICT tools for medical institutions and consumers
We will offer ICT tools that meet the needs of both general practitioners and consumers. To general practitioners, we will provide operating support systems in addition to the test result systems we have delivered so far, while for consumers we will offer PHRs to enable integrated management of personal healthcare data, establishing links between the different ICT tools provided by the H.U. Group and creating new interfaces between general practitioners and consumers.

Through these and related measures, we will create new value that contributes to improving medical consultation efficiency and patient services.

LTS business numerical targets for FY2024

* Five-year CAGR during FY2019–FY2024

2. IVD Business

As stated in "4. Expansion of the OEM business within the IVD business" in "4) Key initiatives under the new medium-term plan," in addition to leveraging the strengths of the IVD business, we will reinforce and expand the OEM business through enhancement of production capacity, reallocation of in-house resources and other measures.

In our domestic business, we will work to boost growth and improve profitability by leveraging H.U. Frontier to offer Group-wide total solutions and enhance sales abilities, expanding external and inter-segment sales of LUMIPULSE reagent products, promoting in-house manufacture and launch of products for the LTS business, and driving fixed-cost optimization through selection and concentration of manual product lines.

In our overseas LUMIPULSE business, we will make a selective review of target regions and focus on unique Alzheimer-related products.

Additionally, we will reinforce point-of-care testing (POCT) with ESPLINE and other products, for which there is renewed demand in connection with COVID-19. Specifically, we will enhance our products with an expanded range of specimen types (saliva, nasal, painless blood sampling, etc.) and product line-ups for infectious diseases. We will also promote sales to LTS business customers through H.U. Frontier, enhance production capacity, and maintain progress in the development of next-generation platforms.

IVD business numerical targets for FY2024

* Five-year CAGR during FY2019–FY2024

3. HS Business

Amid an increasingly challenging business environment for hospitals, we will respond to frontline care needs, actively promoting services that contribute to increasing efficiency and reducing costs in the clinical setting.

As key measures, we will offer Group-wide total solutions through integration of sales forces, intensify total support services including to operating rooms, and pursue continuous operational improvement, thereby expanding profits. As this is a labor-intensive business, we will also focus on labor cost optimization.

HS business numerical targets for FY2024

* Five-year CAGR during FY2019–FY2024

4. Equity Method Affiliates

Baylor Miraca Genetics Laboratories, LLC
In addition to continuing with initiatives to improve business performance, during fiscal 2020 we will raise capital through private placement and prepare the business for a future public offering.

Joint venture with Ping An in China (Ping An SRL Medical Laboratories)
We will continue to promote a trinity model (medical examination clinics, imaging centers, and test laboratories) with a view to achieving a positive balance of profit in equity method investments in fiscal 2022 as per the original plan.

7) Financial Strategy and Financial Discipline

The medium-term plan identifies generation of stable cash flow and maintenance of financial discipline as key themes and sets out the following financial strategies:

1. 1. Maximization of operating cash flow especially through improvement of the cash conversion cycle
2. 2. Finance lease and real estate financing
3. 3. Sale of real estate

Financial discipline

* FY2024