TERUMO CORPORATION Q2 FY2027 earnings call

• Arsenal Medical Acquisition: Completed on October 2 for approximately $250 million plus contingent consideration. Adds NeoCast, a liquid embolic agent for chronic subdural hematoma, expanding Terumo’s neuro portfolio beyond cerebral aneurysms and stroke into adjacent therapeutic areas.
• Blood and Cell Technologies (TBCT) Strategy: TBCT has achieved a 14% CAGR (FY21-FY25) excluding plasma innovations. Management targets >5% revenue growth and a JPY 5+ billion increase in adjusted operating profit for FY27. Key focus areas include establishing Reveos as the global standard for whole blood processing ($1.2 billion SAM), expanding Spectra Optia adoption across disease states, and driving operational excellence via digital/AI technologies.
• Terumo Aortic Recall: Voluntary recall initiated for RelayPlus, RelayPro, and TREO stent grafts due to endotoxin levels exceeding specifications identified in September pre-shipment tests at the Bolton Medical plant. Shipments are suspended globally. Root cause investigation is ongoing, including supplier review. No FDA warning letter has been received yet, but regulatory consultation is active.
• Neuro Supply Constraints: Temporary supply issues at the Costa Rica manufacturing site caused by labor attrition to competitors. Workforce has been secured, but training/learning curve delays shipments. Expected to resolve in 3-4 months; automation is not a short-term solution.
• Strategic Outlook: Management emphasized portfolio transformation and resource optimization. Next 5-year growth strategy (GS31) will be announced on December 15. Leadership stated they aim to address issues proactively rather than postponing solutions.

The following summarizes the financial performance for the first half of the fiscal year ending March 2027 (H1 FY26), as reported by CFO Jin Hagimoto. Note: The transcript reports H1 results, not strictly Q2 isolated figures, but these are the primary segment metrics provided.

• Cardiac & Vascular (C&V): Revenue grew 6% on a local currency basis. Growth was driven by TIS (oncology and endovascular portfolios) in the Americas and Asia. However, Neuro performance remained soft due to temporary supply constraints, and Aortic revenue declined due to the voluntary recall. Adjusted operating profit margin 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 in Asia/Europe). CDMO business in Japan performed well. Reported operating profit margin was 11% (including upfront investment at the Leverkusen plant); excluding this, the margin would have been 14%.
• Blood and Cell Technologies (TBCT): Revenue benefited from strong sales of blood collection products (Trima, Reveos) and Global Therapy Innovations, particularly in Europe, the U.S., and Asia. Plasma innovation is included through Q2 but expected to scale down in H2. Operating profit margin was 17%, driven by key product performance and positive pricing effects.
• Organ Technologies (OT): Revenue increased 36% year-on-year to JPY 11.6 billion, driven by the expanding normothermic machine perfusion (NMP) market for liver transplants. Profit margin was 14% for H1, impacted by Q1 optimization costs and seasonal slowdowns in Q2. The full-year profit margin target remains unchanged at 20%.

• Revenue: Revised downward by JPY 10 billion from the October guidance to JPY 219.5 billion for FY26. This reflects the impact of the Aortic voluntary recall and temporary Neuro supply constraints.
• Operating Profit: Revised downward by JPY 41 billion from the October guidance to JPY 119 billion for FY26. This includes the direct business impact of the Aortic recall and conservative assessments of asset valuation risks associated with the TA business.
• Profit of the Year: Expected to be JPY 87.5 billion.
• Adjusted Operating Profit: Revised downward by JPY 3 billion from August guidance to JPY 271.5 billion for FY26. This excludes one-time impairment losses (e.g., CSL Plasma agreement termination) and reflects underlying core business strength.
• Segment Outlooks: C&V expects solid growth despite Aortic/Neuro headwinds. TMCS expects steady performance with CDMO expansion. TBCT targets >5% revenue growth and JPY 5+ billion AOP increase in FY27. OT maintains full-year profit margin target of 20%.

• Terumo Aortic Operational Failure: Identification of excessive endotoxin levels in stent grafts manufactured at the Bolton Medical plant. This has triggered a voluntary recall and suspension of all shipments from that site. The root cause is still under investigation, involving both internal processes and suppliers.
• Financial Impact of Recall: The recall is projected to negatively impact FY26 revenue by approximately JPY 8 billion and operating profit by JPY 41 billion. The large OP impact includes conservative provisions for potential asset impairments related to fixed assets and intangible R&D assets acquired during the Bolton Medical acquisition.
• Regulatory Uncertainty: Potential for FDA warning letters or further regulatory scrutiny regarding the manufacturing defects at the Bolton plant. The scope of the investigation extends to suppliers, complicating the timeline for resolution.
• Supply Chain and Labor Risks: Terumo Neuro faces temporary supply constraints in Costa Rica due to high employee turnover to competing manufacturers entering the region. While staffing is secured, the learning curve for new hires delays full production resumption.
• Asset Valuation Risks: Management has taken a conservative view on asset valuations for the Aortic business, acknowledging that if shipments do not resume soon, significant impairments may be recognized, potentially affecting future P&L structures.

Q: Analyst asked about the scope of the Aortic endotoxin issue, whether it is limited to the Bolton plant, and the potential for FDA action.

A: Management confirmed the issue is isolated to the Bolton plant and did not occur at other Terumo facilities. They stated they are investigating a broad area, including suppliers, to identify the root cause. Regarding the FDA, management admitted they do not know what actions the agency might take and cannot predict if a warning letter will be issued.

Q: Analyst questioned the composition of the JPY 41 billion operating profit reduction, specifically asking if the majority stems from asset value impairments.

A: Management explained that the JPY 41 billion figure includes the loss of second-half revenue, recall-related valuation reductions, and risks associated with fixed and intangible assets from the Bolton acquisition. They clarified that the largest portion of the risk relates to these acquired assets, noting that while no specific impairment amount is fixed, the calculation assumes significant negative factors to be cautious.

Q: Analyst asked if production could be relocated from Bolton to Glasgow to mitigate the shortage and how long recovery would take.

A: Management stated that transferring production lines involves a long lead time, so it is not assumed for the short term. Regarding the timeline for resuming shipments, they emphasized that corrective actions must be validated, making it difficult to forecast when stable supply will return for the next fiscal year.

Q: Analyst inquired about the Neuro supply constraints in Costa Rica, asking if automation could solve the labor shortage and how long training takes.

A: Management confirmed that competitors have opened large plants nearby, causing labor attrition. They stated that automation is not a viable short-term fix as previous attempts faced challenges. Instead, they are focusing on pay parity and cultural support. Training for new workers is expected to take 3-4 months to reach full production capacity.

Q: Analyst asked about the Arsenal Medical acquisition's milestone payments and the status of the CSL Plasma termination and Leverkusen plant.

A: Management described the milestone payments as a standard model, estimating roughly JPY 4 billion per year in R&D expenditure depending on development timing. Regarding CSL, they confirmed the transition is on track. For the Leverkusen plant, they are ramping up production capabilities and negotiating with pharmaceutical companies, though no major contracts have been finalized yet.